Do you know how much your 401(k) offering really costs? It can sometimes be hard to tell, with fees and charges coming out of earnings before employees even see them.
According to the Center for American Progress, studies frequently find no correlation between higher fees and a better portfolio performance. In fact, some studies even show a negative correlation, meaning the more expensive retirement plans may perform significantly worse than their cheaper counterparts.
Some fees will always be inevitable, but knowing which charges to avoid can help you give your employees a highly successful retirement savings fund that encourages high levels of usage and engagement. Here are some of the most frequently overlooked 401(k) fees that could easily be cutting into an employee’s retirement savings.
Commissions are usually flat fees per transaction. Every time a broker sells stocks or purchases options, that action comes with a charge, sometimes upwards of $10. Having to pay so much for each sale and purchase can significantly eat away at a fund’s earnings and may even contribute to overall losses.
Not all 401(k) options will be riddled with commission fees. Working with a consultant that ties compensation to overall portfolio performance rather than raw sales numbers can save your employees from these extra costs.
This category of fees covers all the necessary administration fees that come with a retirement plan: accounting, legal fees, office administration and more. While plan administration fees are far from secret, you may be surprised by just how many there can be.
These fees are charged every year and while they are usually small, they can have a significant impact on newer accounts. As an employer, you will need to decide whether you are going to pay these fees yourself or take them from employee earnings.
Actively managed retirement funds come with fees for the privilege of having someone else manage the account. This fee is a percentage tied to the value of the retirement fund and can take a huge swipe at employee earnings, especially as a fund grows. A 1% investment advisory fee may not sound like much, but an employee who has 200,000 dollars saved for retirement could be forking over 2,000 dollars a year.
While you won’t escape advisory fees for actively managed accounts, the costs can be cut down and streamlined by consulting agencies that implement more advanced technologies. Where a human investor might stick to that 1% fee, an algorithm-based digital advisor may very well cut it down to .10% or lower.
These are your asset-based costs. One of the sneakier fees of the 401(k), internal expense ratios have been decreasing as more people have begun to take strong notice of them, as evidenced by this 2015 investment study. While in years prior, a typical expense ratio could be as high as .75%, they now average closer to .64%. While this may seem like a small difference, it could save employees thousands in the long run.
Investments can feel like a foreign language to many who don’t work in finances. If employees feel like they don’t fully understand their options, they will be more passive participants in their 401(k)s and may miss out on significant amounts of money. That’s why it’s important not just to hunt for low fees for your employees, but to give them the tools they need to understand their investment options, allowing them to make the choices that best fit their lives and futures.