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Don’t let high-expense funds cost you your nest egg

03/03/2010:

Small business 401(k) plans are often saddled with high expense funds. Unfortunately, paying more for funds is not correlated with fund performance. In fact, participant fees can be the biggest drag on the growth of you and your employees’ nest eggs. Deloitte Consulting LLC conducted a study of 401(k) costs in late 2008 that showed fees averaged 2.03% of a plan’s assets for companies with less than 100 participating employees. Yet, for companies with over 100 participants, average fees drop to less than 1%. That’s quite a premium to pay.

Shooting for 1% or less in participant fees can make a big difference for you and your employees. Just 1% of additional fees can take a big chunk from how much you have at retirement age. Consider a hypothetical situation of two investors, John and Alan. Both have $50,000 in a 401(k) plan and never contribute to it again. They are fortunate to both achieve 8% fixed returns each year. However, Alan’s funds have an average of 2% in fees and John’s only 1%. The effect of the higher costs compounds and becomes profound over time.

John will have saved $372K in 30 years and Alan will have $274K. That’s $98K more for John than Alan. Extend this another 10 years to 40 years, and John has a whopping $242K more than Alan ($727K for John vs. $484K for Alan)! That’s a meaningful difference. And keeping fees low can be an easy way to meet some of your fiduciary duties for your business.

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