What Is The Real Cost Of Your 401(k)

What Is The Real Cost Of Your 401(k)

It's pretty simple: 401(k) prices are based on the number of employees you have and your plan's total assets, right? Unfortunately, no, it's not that simple.

In fact, 57% of small plan sponsors and 31% of large plan sponsors don’t know their fees – or they assume the fees are waived. The cost of this confusion can be high. The good news is that 25% of today's plans are paying less than .94% in fees, and they are in good shape. But that also means the other 75% of plans are overpaying fees, and that cost hits employees. For a company with 200 employees and $20M in plan assets, that represents about $2.4M in lost retirement savings.*

This post was adapted from our recent webinar on 401(k) pricing and uncovering hidden plan costs.

“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 C. Bogle, Vanguard Founder. From The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

It's not just your employees who are looking to you to make sure that they're not wasting their retirement plan on unnecessary fees. The Department of Labor is looking to you too. They’re holding you responsible for your employees’ retirement savings as the fiduciary to the plan.

That's not easy to do.

When you dig into the fees, you'll find they can be stacked, stacked in a way that can be many times higher than what you initially thought. In the example below, it’s easy for a plan participant to see “Recordkeeping Services equals .22%” (top line in grey). But if you slow down and calculate all the costs, it’s almost five times higher: 1.05%. And this is one of the more straightforward fee disclosures to review.

Sample fee disclosure from a recordkeeper

Investment costs can hide a revenue share that’s too high

One of the most significant contributors to fee confusion has to do with a revenue share between the 401(k) advisor and recordkeeper. There’s nothing inherently bad about a revenue share. The problem comes when a revenue share is opaque to the sponsor and hides a reward to the advisor or recordkeeper for recommending specific investments. Moreover, different funds provide advisors different levels of revenue share amounts – with higher-priced funds generally kicking more fees back to the advisor that recommended them.  

Having said that, I think there is definitely something inherently wrong with revenue sharing. They not only obscure what advisors are actually earning, they create an inherent incentive for advisors to recommend higher-cost funds.  

Yes, your advisor and recordkeeper deserve to get paid a reasonable fee for their services. But if you don’t know what the fees are, you can’t determine if they are fair.

Let’s take a simple example: a $20M plan with 2,000 participants, recordkeeping fees that average roughly .22%, and investment fees at 1.01%. That seems straightforward. The problem: it’s masking a revenue share that’s pretty high.

Of that 1.01%, not all is going to the mutual fund companies. A portion of that fee is revenue sharing (in the example below, you can see the fee breakout). Yes, your advisor and recordkeeper deserve to get paid a reasonable fee for their services. But if you don’t know what the fees are, you can’t determine if they are fair.

As my grandmother used to say, “If you don’t know what you're paying, there's a good chance you're paying too much.”

In this example, you’re paying an unnecessarily burdened cost:

Typically, the higher the investment fees, the higher the revenue share. It's important to understand investment management, because there may be a conflict of interest. If the team recommending the funds to your plan is making more money if they choose higher-cost investments, they will not be operating in your best interest.

Unfortunately, this is common and is something we see across all plans. The real challenge is the lack of transparency.

Reducing costs can be done quickly with the providers you currently use

It's not difficult to renegotiate fees, but it does require a plan – and we’re here to help. We identify the revenue sharing in your plan so that it's transparent, not only for you but also for your participants.

Reducing or removing revenue sharing can lower fees and boost returns. It's worth noting, regardless of company makeup or demographics, in most instances, we've seen outstanding outcomes when a plan removes revenue sharing and removes expensive funds. Based on our experience, we've seen that our process can often reduce the overall cost of the plan by 30-50%.  

That’s right, if your plan includes revenue sharing, your employees could be literally paying 2x as much as they need to.  

The process is two-fold: begin by auditing your current fees so you can understand exactly where the money is going. That tells you where to negotiate, which is step two. Once you’re aware of where the money is going, you can work with your recordkeeper and advisor to negotiate better rates.

We’re here to help

Whether you're a client of ours or not, we want to point you in the right direction. We're talking about people’s retirement. We're talking about the money that they've earned and saved throughout their working career. It's important and imperative for employees to keep as much money as possible, because they will need it.  

*401k Averages Book. Assumes 200 employees, $20M in plan assets, 25th percentile fees 0.94%, 75th percentile fees 1.12%, 20-year horizon, $5k annual participant contributions, and 6% annual growth.