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.
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 in 401(k) plans are typically earned at the point of the transaction; meaning, when an employer decides to “switch” to a different plan. Commissions typically range from .5% to 1.2%, paying the sales rep a one time $5,000 to $12,000 for every million dollars in the plan. You can see how this number can get large, especially for larger plans.
Usually paid as a lump-sum, this middle-man compensation results in inflated ongoing expenses for participants, further deteriorating market investment returns.
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.
At NetWellth, we forgo product sales commissions so that our clients have complete transparency from day 1, and no reason to look for another service provider.
Plan administration fees
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.
Investment advisory fees
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 .8% or lower.
A $5m 401(k) plan that grows by 8% per year and uses a human investment advisor (charging an average of 1%/yr) will be charged $771,765 MORE than if the same plan used a robo-advisor (for .12%/yr) over the next 10 years:
|Human Investment Advice for 1% per year equals $958,868 over 10 years.||vs.||Robo-Investment Advisor for .12% per year equals $119,342 over 10 years.|
Internal expense ratios
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.
Regularly $3,890, you can receive a complimentary analysis by emailing email@example.com and referencing coupon code (FREETMA) in the subject line.