How to Get a Low-Cost Small Business 401(k)
“The grim irony of investing, then, is that we investors as a group not only don’t get what we pay for, we get precisely what we don’t pay for. So if we pay for nothing, we get everything.”
—John Bogle, Founder Vanguard
No matter what industry you work in, getting a low-cost 401(k) plan for your company is expected by the best and brightest talent. If you’re looking for a 401(k) plan that measures up to the same 401(k) plans that large companies offer — low fees, great fund selection, easy plan administration, and one 401(k) platform to manage all of the plan administration — then schedule a time to chat with someone from our team.
So you want a 401(k) that won’t cost the business a ton of money and keeps more cash in your employees’ accounts (and out of other people’s pockets).
There are a lot of reasons to care about fees. Maybe you’re focused on fees because you’ve seen the data – that lowering fees just 0.90% can help employees have 20% more in retirement over a typical career.
Maybe you want to avoid having employees complain about a limited number of expensive 401(k) investments.
Either way, getting 401(k) costs as low as possible is a great idea.
If you’re already looking at a few providers, chat with our 401(k) specialists and check out our platform. Once we’re done, we’ll send an apples-to-apples comparison on how we stack up to everyone else on your list.
Creating a low-cost 401(k) is easier said, than done
I’ve talked to hundreds of small business owners over the years, and it is shocking how few really understand how much their 401(k)s actually cost. Most of them tried to create a low-cost 401(k), and thought they had, but most were pretty expensive.
And it’s easy to understand why… Most providers and advisors say they try to keep costs low. They’ll often focus on the part that is inexpensive and then gloss over other areas that are pretty darn expensive. It’s like that old street hustle 3-card monte, where the hustler uses slight of hand to distract you from what’s real – only they’re playing with your retirement. I don’t like it.
The typical result – expensive 401(k)s. Just look at the recent range of 401(k) costs calculated by 401(k) Averages (14th edition). Expensive 401(k)s come in at nearly 5x the cost of lower cost options.
Could you imagine any other product where some people pay 5x as much for essentially the same thing?
How to avoid an expensive 401(k)
The first step in making sure you set up a low-cost 401(k) is understanding the different ways 401(k) providers charge fees. So in this post, I’ll talk about the different types of small business 401(k) fees. In a future post, I’ll share strategies we use to get these fees as low as possible! We also offer fee comparison services for free, just schedule time to chat with a retirement consultant on our team.
Small business 401(k) fees
There are at least 6 different types of common 401(k) fees:
- Start-up fees
- Recordkeeping platform fees
- Participant fees
- Custodial/trustee fees
- Investment fees
- Advisory fees
It’s a lot to keep straight, so I like to lump costs into one of two buckets:
What your business typically pays vs. what your employees typically pay.
What your business typically pays
As the employer, you’ll generally pay the start-up and recordkeeping platform fees which cover the basic work needed to, well, keep records (e.g., tracking contributions, balances, running compliance tests, etc.).
You are also likely to pay the participant fees, which typically cover print mail costs (who still does that?), customer support personnel, etc.
Fees to employers often look like this:
What employees typically pay
Employees typically pay “percent” fees. I call them “percent fees” because they are usually shown as a percent, like 1%. These fees typically include the investment fees, custodial fees, and 401(k) advisor fees. They may feel deceptively small, but they can really erode both your and your employees’ savings.
Total cost for a small business 401(k)
Now that we understand both the typical employer cost and the typical employee cost, we can put it all together to calculate the total plan cost.
Time for a twist – revenue sharing (i.e., 3-card monte)
As if 401(k) fees weren’t confusing enough, I’m going to throw you a curveball: revenue sharing. Remember that “3-card monte” game? Well, that’s revenue sharing. Basically, revenue sharing is a way to transfer costs – often onto employees. It’s also a way for some recordkeepers to make even more money.
For example, some small business 401(k) providers will sell a 401(k) with really low employer costs and then load you up with really expensive investments that share revenue with the recordkeeper. They like it because it makes the 401(k) look cheap, but in the end, they can make a lot more money (especially as the assets in your 401(k) grow). We can help unravel these fees for you and show what’s behind the curtain of fees.
Revenue sharing is essentially just a fancy way for some retirement providers to shift costs from the employer bucket to the employee bucket, and hopefully you won’t notice their slight of hand.
While this practice is legal, it can be hard to understand exactly how much each party is getting paid. Recordkeepers often like this option because they’ll end up making more money as your plan grows in size, even if they are essentially incurring the same work. To make matters worse, by shifting all the employer costs to employees via higher mutual fund fees, employers can lose valuable tax deductions.
Whether it’s because they prefer transparency or because they recognize that lower fees help savings grow faster, many 401(k) advisors (us included) stay away from revenue sharing. Instead, we often use low-cost mutual funds and charge a separate and clearly identifiable fee. This approach is not only more transparent, but can often significantly reduce fees overall. Which means more savings in your pocket!
What do you think?
How do these fees compare to what you’ve seen? Is there anything I didn’t cover that would be helpful? Do you want to swing by ForUsAll‘s office and play a hand at 3-card monte?