You Pay More for Your 401(k)

Horse And Handler Statue,  Department Of Labor
Image by paul_houle via Flickr
Studies have revealed that plans provided by insurance companies and brokerage firms tend to be higher in cost. The retirement plan is far too important to allow Wall Street to cash in.

Participants in smaller 401(k) plans pay higher expenses on average than participants in larger plans, according to study results announced in a press release by Financial Research Corporation(FRC). But this may change as the result of greater awareness of costs.”The average participant-paid costs as a percentage of assets for the smallest plan groups was more than three times those of the very largest plans,” said FRC. Even small differences in expenses can make a big difference in 401(k) investors’ long-term returns, as Smart Investor has discussed in “One Percent Can Make a BIG Difference to Your 401(k) Plan Participants.”

Here’s an even more disturbing fact, cited by Leslie Prescott, the FRC study’s author: “…comparably-sized plans within an industry often had substantial differences in the actual dollar amount of annual fees that a participant would pay, amounting to hundreds and even thousands of dollars a year.” This suggests that the higher-paying participants’ plan sponsors didn’t research and hire competitively priced providers.

Cut 401(k) Plan Costs Today

If your plan participants are paying above-market fees for comparably sized plans, you can fix that.

For starters, you can ask your current providers about more competitively priced approaches. Also, conduct research on plan providers and their offerings. Don’t automatically pick the cheapest plan. Remember, sometimes you get what you pay for, as Smart Investor discussed in “Should Your 401(k) Plan Pick the Lowest-Cost Investment Provider?

Costs May Fall with More Fee Disclosure

Pressure is ratcheting up on 401(k) providers to offer more attractively priced plans ahead of the Department of Labor‘s requirement for better disclosure of fees. Stay tuned for more developments!

Costs do matter. One solution is to have your plan benchmarked against your peers.

Please comment or call to discuss.

  • The Search for a Better 401(k) Plan (401kplanadvisors.com)
  • Regulations and Costs Shaping Future of 401k Plans According to FRC Study (401kplanadvisors.com)
  • Four ways starting a 401(k) can help your small business (401kplanadvisors.com)
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