Today, technological transparencies are being applied to almost every aspect of our lives, to the benefit of consumers. Being more informed about costs and procedures means you can make more informed decisions.
Yet despite this progressive trend, the conventional 401(k) fee and service models still continue to conceal billions in fees that simply are not necessary and directly work against the growth value. Beyond a relationship, many of these fees are hard to justify.
There are roughly $70 billion in unnecessary 401(k) fees, in the United States. Most conventional commission-compensated “advisors” are not paid to help employers find and eliminate these fees, leaving employees stuck paying a growing bill. For example, a $5m 401(k) plan that grows by 8% per year, will pay $881,518.30 for every 1% in fees, over the next 10 yrs.
Many high tech 401(k) platforms are re-defining the game to help eliminate some of these unnecessary fees. Some of them work with financial advisors, others recognize them as the problem and are keen on replacing them with a 100% tech-package.
Let’s go over which fees your plan actually needs, how much you should be charged for them, and how NetWellth can help you lower the costs to your employees while increasing the value they receive from human service.
Nothing is completely free, and many 401(k) fees provide necessary services. These fees are used to keep the account tax qualified, accessible to you through the internet, and supply you with the tools to keep track of your investments.
Tech-Based Administration and Recordkeeping (Flat or Per Participant Fee)
Accounting and recordkeeping costs are necessary, but they should not rise as the plan grows. These fees provide compliance and online account access. 401(k) plans with $1m to $10m should not pay more than $10,000 per year for these services.
Mutual Funds, Institutional Share Classes and ETF Expense Ratios
These fees are necessary, but should average below .25% and have 0% in revenue sharing charges like 12(b)(1) and SubTA fees. If you’re paying more than this amount, then it’s worth taking a second glance at your provider options. These fees are broken down in your 408(b)(2) Mandatory Fee Disclosure.
Other Service Fees
These are extra fees added to 401(k) plans on an individual basis. Rather than being part of the package deal, employees opt into these services. Examples include fees charged to employees who take a loan from their 401(k) plan or execute participant investment directions.
and Oftentimes Hidden Fees
Large insurance carrier products, sold by commission-compensated representatives are notorious for inflating revenues by creatively shifting costs between their recordkeeping, administration, and investment management platforms.
Your 408(b)(2) is required to come with a Mandatory Fee Disclosure through your online portal. Looking through this disclosure carefully will give you a solid picture of what fees you and your employees are paying.
Recordkeeping and Administration
While these fees provide necessary services, you still need to look closely at the breakdown of costs. Recordkeeping and administration fees can be artificially inflated, costing your employees thousands in retirement savings.
Be aware of recordkeeping and administrative pricing that charge as a percentage of assets. These fees can add up, especially as plan assets grow over time. Recordkeeping should be priced as a base fee plus a per participant charge.
Investment Management Fees
(mutual funds, money managers, plan fiduciaries)
This is where you’re most likely to find artificially inflated fees that slide under the radar. For a managed 401(k) plan, there will always be management fees, but that doesn’t mean you have to be stuck with large monthly costs that eat into the fund’s growth.
Consider where your plan’s investment advice is coming from. Human investment advisors charge an average of 1% per year while robo investment advisors typically cost below .15% and are more reliable. Data from the Securities and Exchange Commission shows this small difference can add up to a 6-figure lifetime cost for an employee’s retirement fund.
12(b)(1) fees unnecessarily inflate mutual fund (or sub-account) expense ratios. These fees are charged based on the account’s performance. This leaves you with an account that procures even lower returns during a down market while lagging behind on the rewards of an up market.
SubTA: these function in the same way as 12(b)(1) fees. The only difference is where the revenue from these fees is going, but no matter whose pocket their lining, these fees are unnecessary.
Those extra fees are really costing you
The average $3m plan pays 1.9% all-in for fees, when they could be paying .8% (or less). The difference may not seem like a lot but it adds up to an extra $630,243 in unnecessary fees paid, over the next 10 years.
All-in expenses should not exceed 1% (for plans greater than $1m) and should offer services designed to encourage employee participation by adding real value to the lives of those that elect to contribute.
At NetWellth, we believe that only humans can solve human problems. Not just any humans, but those whose financial interests align with your desired outcomes. Your organization may benefit from some or all of these NetWellth initiatives:
- Improve engagement between employer and employee
- Lower employee benefits costs
- Increase participation
- Provide resources for employees on financial or emotional literacy
Total Market Analysis
Retirement plans are in the midst of a huge transition with technological efficiencies, and fee-based relationships are struggling to justify their costs. While you may feel that your 401(k) isn’t “broken”, it does help to keep a running comparison of your plan’s expenses to those of similar 401(k)’s offered by other companies.
Have your plan independently benchmarked (not from someone trying to sell you a different plan) to the new wave of tech-based providers that focus on transparency and ease of use. You will see how your plan stacks up compared to other plans of a comparable size within your industry. This will also give you the chance to keep tabs on the efficacy of your plan, allowing you to change offerings and services to better suit the needs of your employees.
Regularly $3,890, you can receive a complimentary analysis by emailing firstname.lastname@example.org and referencing coupon code (FREETMA) in the subject line.
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