How to Compare 401(k) Plan Fees

To help any business owner understand and accurately compare 401(k) plan costs, here is straightforward education on 401(k) expenses and how to uncover hidden fees that we believe are all too common in the industry. Whether you're a business of an employee or two starting your first 401(k), or a business with a hundred or more employees thinking about switching providers, you deserve a fair-priced 401(k) plan.

The Three Core Cost Components of 401(k) Benefits Are:

The Setup or Conversion cost – this is the one -time charge to either set up your first plan or convert from another provider.

Administration / Record keeping charges – ongoing expense to service your employees, plans sponsors, and help ensure your plan is run in a compliant manner.

Investment Expenses – these include the fund expense ratios, revenue sharing (12b-1s), custodial, and/or investment management services.

Setup and Administration Charges

The Setup and Administration are typically paid by the employer, although some providers are also charging a monthly per participant fee of $4 to $8 per eligible employee.

The good news for employers is that the charges that the employer pays are tax deductible (if employees pay it, it is not deductible). Plus, for companies with less than 100 employees starting their first 401(k), they will receive tax credits too for the first three years to help offset these costs to the tune of 50% to 100%.

While costs for these services can vary widely, there are excellent providers that work to keep costs low and provide great service too. In general, the fewer employees and the more assets you have, the lower your costs will be except for those that charge a per participant charge. The per participant charge tends to remain constant.

For perspective, at ShareBuilder, the ongoing administration for a company with 10 or less participants starts at $95 per month and drops to $0 when the company grows past $5 million in assets. A 50-person plan might cost $210 per month and drop to $0 as assets top $5 million.

Investment Expenses

Many employers get focused on the administration costs, yet it’s the investment expenses that are the most important costs to understand and minimize. Unfortunately, they can be the toughest to identify and manage. Many 401(k) providers offer investments that are mostly actively managed mutual funds or insurance products. These may have revenue sharing and/or 12b-1 fees that add expense and sends added revenue to your 401(k) provider. It’s why you see so few 401(k) fund line-ups that are all or mostly index funds. Index funds don’t have pass through fees, so less revenue will be generated for a provider, which creates less incentive for some providers to offer them. So, when you see a fund line-up where most of the expense ratios are over 0.80%, this should register as a more expensive line-up.

Why is the Fund Expense Ratio a Big Deal?

While there are no guarantees, low-expense funds have historically outperformed higher expense fund options. In fact, index funds are typically the lowest expense and have a very strong historical track record in outperforming actively managed funds. Most owners have some of the largest, if not the largest balance, in their company’s 401(k) plan, and the more you pay in expenses, the less that stays in the market to build you a bigger nest egg. Or put another way: high expense funds impact how much money you will have saved for retirement.

There are other investment expenses too. You often will see an investment management or asset management charge. This is for your advisor to recommend or manage your fund line-up for your company. Every company is required to provide oversight and expertise in selecting their 401(k) plan investment line-up. Many will outsource this to ensure it’s done at a high level as well as save the time and energy of doing it themselves. Advisors that manage the whole process take this fiduciary duty off your shoulders too. This is called an ERISA 3(38) advisor, and they must act in an unbiased manner and in the best interest of your employees. All ShareBuilder 401k plans include these services.

This is also an expense to manage. Ideally, this is well under 1% and lowers automatically as your plan grows versus needing to constantly negotiate with your provider.

Lastly, you may find there is a custodial expense. This service is for holding investments and keeping them in safekeeping. Some providers won’t have this expense and/or won’t pass it through to participants but many do. This expense can be difficult to uncover. You may need to ask your provider and others you are considering if they charge for custodial services. Some are as high as 2% plus trading costs, and some will be 0%.

Calculating Your Investment Expense

When comparing investment expenses, you will want to:

1. Determine the average of the fund expense ratios (give more weighting to most utilized funds or that you expect will be if you are able).
2. Add investment management expenses.
3. Add custodial expenses.

Once you sum all this up, you can get a real sense of how competitive each provider is. A small business should expect the sum to be well under 1% and ideally come with an automatic pricing schedule that lowers as the plan grows. A medium-sized business can expect a greater range that will be based on the number of employees and assets. The range to shoot for is 0.30% to 0.75% all-in and, look to get an automatic pricing discount schedule as your plan assets grow.

Beyond these core areas, there can be other one-off costs for various services (e.g., plan amendment, an employee 401(k) loan), but these are generally not material and only as the company or an employee uses them.

You may also be wondering about providing an employer match and if it’s required or do tax credits and deductions apply (they do J). Here are some additional resources to keep you in the know:

To Match or Not To Match:

Employer Matching Tax Credits and Deductions:

Key Takeaways:

• Setup, administration, and investment expenses are the core costs of a 401(k) plan.

• Setup and recordkeeping/administration are tax deductible expenses for the business and those with less than 100 employees starting their first plan will qualify for tax credits for the first three years. Costs for these services should be pretty minimal for the company.

• Recordkeeping costs charged to participants are not tax deductible, and if possible, good to avoid.

• Investment expenses are considered the most important to understand and manage and can be the most difficult to gather. These costs can have direct impacts on how much each employee, including owners and leaders, can build for retirement. If you can get a fund line-up made of all or mostly index funds, you will likely be well ahead of most plans.

• Investment expenses will include fund expense ratios and can also include investment management and custodial expenses. The goal for a small business is to keep these under 1% and for midsize businesses in the 0.30% to 0.75% range. Work to have an automatic pricing discount schedule that lowers these expenses if and as your plan assets grow.