Okay, if you're reading this post, you already know: 401(k) fees are expensive.
Taken as a percentage of the assets, over time, they can add up to a HUGE chunk of change that can take years off of your or your employees' retirements. A 2% fee doesn’t sound like daylight robbery, but over 35 years, that little fee can consume up to half of your retirement earnings.
All of this is to say that minimizing 401(k) fees is crucial for retirement success. Of course, easier said than done. It can seem like there are a million different 401(k) fees, and all of them are complex and near impossible to find if you don't know where to look.
Luckily, we do. And we're going to show you.
In this guide, we'll walk you through the six steps some forward-thinking plan sponsors are following to lower their fees by as much as 50%! Whether you're starting a new plan, already have a plan, or are just looking to learn, you'll walk away from this post with actionable tips you can implement that could save you and your employees THOUSANDS.
Ready to get started? Let's jump right in!
Step #1: Benchmark Your Fees
The first step to lowering your 401(k) investment fees is to understand how you stack up.
Average 401(k) plan fees can be hard to find, often because indirect fees aren’t included in expense ratios and don’t get reported on public records like form 5500. Luckily, we’ve got that information for you:
In general, we think all of those fees are too high. We like to see all-in asset-based fees below 75 basis points (0.75% of the net plan assets).
To figure out what your all-in costs are, you’ll have to locate your 408(b)(2) fee disclosure. Then you’ll want to compare what you are being charged to the average fees and costs associated with a 401(k).
We built an entire page to help with this process. Visit our ultra-helpful 401(k) Benchmarking Center to quickly and easily find your fee disclosure and see how your plan measures up against industry averages.
When you’ve figured out this information, you’re well-prepared for the next step in lower 401(k) fees: negotiation!
Step #2: Negotiate Low Recordkeeping Fees
Often, it’s up to the plan sponsor or administrator to negotiate low recordkeeping fees. While that’s not always easy, the benchmark you got in Step #1 will help you out here.
We’ve also got a couple of tips:
Ask Your Recordkeeper
Most plans don’t request to review their pricing, and recordkeepers rarely change fees unless they are asked to. Sometimes all you have to do is ask.
When heading into a negotiation, you should also consider getting bids from other recordkeepers. Like any other business, recordkeepers will price competitively when they need to. Take advantage of this.
It also helps to take a look at the funds which make your plan, and consider…
Step #3: Replace High-Cost Mutual Funds With Low-Cost Index Funds
Some types of funds come with steeper fees built in. We’re talking actively-managed mutual funds vs. passively managed index funds.
Actively managed funds involve humans doing actual work and analysis, which means they cost more. But depending on the fees you’re facing, that extra effort might not translate to retirement ROI.
In fact, a 2016 study by S&P Dow Jones Indices found that 90% of active fund managers failed to beat their index targets over the previous 1, 5, and 10-year periods. As it turns out, the higher fees were a significant factor in this underperformance.
While stock managers have some reasonable explanations for this (“The 2008 financial crisis!”), it’s worth noting that a lower cost index fund could just be a much more effective option.
Index funds like Vanguard’s 2045 Target Retirement Fund, with an expense ratio of 0.15% and no load fees are an example of how low-cost these funds can be. That low cost can come without sacrificing much performance. From 2005 to 2015, the Vanguard 2045 TRF generated an average annual return of 6.61% - landing itself among the top performing retirement funds.
Low-cost funds are also less likely to come with hidden fees that cut into retirement savings. Speaking of which...
Step #4: Avoid 12b-1 Fees
On top of everything else, some funds charge 12b-1 fees. These fees are intended to cover marketing and service costs. Essentially, they’re sales commissions for the broker or advisor who selected and sold the funds.
12b-1 fees generally range between 0.25% and 1% of total plan assets, with the cost varying depending on the fund and advisor.
The 12b-1 fee might not seem exorbitant, particularly for the services of a good fund advisor, but even a small unnecessary fee can do damage to your overall savings (remember the impact that even a 0.5% increase in fees can have).
It's also worth noting that if your advisor is compensated with 12b-1 fees, they’re incentivized to build a high-fee fund lineup, often with lots of actively managed funds - something that could be really eating into your plan participants’ retirement nest eggs.
In the meantime, you can also look into Multiple Employer Plans...
Step #5: Consider a Multiple Employer Plan
Multiple Employer Plans (MEPs) are an option laid out under section 413(c) of the Internal Revenue Code that allows companies to use a retirement plan that is sponsored by a third party, which also takes on the administration of the plan.
Essentially, an MEP allows you to pool assets with other companies and negotiate much lower overall 401(k) fees.
There are a lot of opinions about MEPs, but, like most things related to the 401(k), success comes down to how it’s managed. MEPs can be an excellent option for lowering your 401(k) fees.
Step #6: Minimize 401(k) Administration Fees By Lowering Audit Costs
If you’re in responsible for your business’s 401(k), you know that 401(k) audits can be expensive - on top of all the administrative fees you’ve already paid. We generally see sponsors pay from $10k - $15k for the annual audit, but if you’re on a complicated payroll setup with multiple locations, it can quickly get a lot more expensive.
And that bill has to be paid every year.
Thankfully, If you eliminate costly plan administration errors from your plan, your audit will go a lot more smoothly, which may mean that you may be able to negotiate a much cheaper audit.
Tip: For all the details on keeping your plan audit as painless as possible, check out “The Complete Guide to a Fast, Pain-Free 401(k) Audit.”
Fees are often intentionally opaque, but hopefully, we’ve made the process of getting lower fees a bit more transparent. We’ve covered these six steps to avoiding high 401(k) fees:
- Step #1: Benchmark Your Fees
- Step #2: Negotiate Low Recordkeeping Fees
- Step #3: Replace High-Cost Mutual Funds With Low-Cost Index Funds
- Step #4: Avoid 12(b)(1) Fees
- Step #5: Consider a Multiple Employer Plan
- Step #6: Minimize 401(k) Administration Fees By Lowering Audit Costs
Whether you were just looking for information, or you’re ready to take action, you’ve now got a roadmap for bringing down your 401(k) fees.
On top of all that, we’ve got one final resource to help you in your quest for lower fees. Our 401(k) Fee Pricing Calculator lets you quickly and easily see your potential fees from 3 major recordkeepers. Check it out!