How to Assess and Compare 401(k) Plan Costs

Here are five items to know and consider that will help ensure you are receiving a fair price for your 401(k) plan. No matter if you are thinking about starting your first retirement plan for your business, or you are reviewing your current provider’s costs, make sure you evaluate the following:

1. Keep all-in investment expenses under 1%. While it’s easier to focus on administrative costs, low investment expenses are what really matters when it comes to a good 401(k) plan and for investing in general. Investment expenses include the fund expense ratios as well as any investment management, 12b-1, and other associated costs. Whether you’re just starting a plan or have a plan with $25 million in assets, it is more than doable to keep costs under 1%. We believe this is essential for long-term success.
2. Limit your investment options to low-expense funds. What percentage of your investment roster is made up of index funds versus actively managed funds? Index funds typically have lower expenses than actively managed funds. If most funds in your investment roster are actively managed investments, think about how the expenses stack up and whether the fund performance of these over 5 and 10-years align with their benchmarks and comparable index funds.
3. Work to have recordkeeping and administrative costs charged to the employer versus a flat per participant charge. It’s not uncommon for a flat per participant charge to be applied to small business and even mid-size company plans. It’s typically a flat monthly or quarterly charge deducted from each participant’s account. Ideally, beyond the investment expenses, there are no costs passed on to the participant so more money stays invested in the markets. If admin costs are covered solely by the employer, the costs are tax deductible for the business, but if passed on to participants, these are not deductible. Also, small businesses with a new plan, may receive tax credits in addition to deductions to manage admin costs. If the plan is large enough, investment expenses may cover admin costs altogether.
4. Know how your 401(k) provider(s) earns money on your plan. A straightforward and fair approach is to apply a flat investment management expense across the plan to manage ERISA 3(38) services, plan consultation, employee education, and in some cases recordkeeping and custodial services. Don’t be surprised to find that marketing expenses (12b-1s and revenue sharing), share class, and wraps vary by fund with your current provider. Why? How is that fair? These other fees and expenses can unknowingly penalize an employee for picking one fund over another. Also, are you getting the services you want, desire, or need to run a great plan at a reasonable price? Does the service really vary by fund?
5. Does your 401(k) provider keep costs in check? Does your provider offer automatic pricing discounts to lower expenses as your plan grows past identified milestones to ensure pricing remains low for employees and your business? We believe this is the right approach. As your plan assets grow, pricing needs to drop as your plan becomes more valuable to your provider. Lower costs can help employees save more over time too.

We hope this provides you valuable insights on how to get a plan priced right for your business. To learn more about 401(k) costs, check out Understanding 401(k) Costs. To learn more about 401(k) services, give this a read What 401(k) Plan Services Your Business Will Need and Value.