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401(k) Fees: Are Traditional 401(k) Services Worth a Smaller Retirement Nest Egg?

Eric Droblyen

December 28, 2022


I have a confession – my company’s participant benefit statements are nothing special.  While they disclose all the requisite information, they are matter-of-fact and lack color graphics.  They’re also delivered electronically, not mailed.

Our statements are in sharp contrast to the paper statements my college professor wife receives each quarter by mail from TIAA, her school’s 403b provider.  Her statements are printed in glossy color on heavy paper stock.  They also include pleasing pictures of happy retirees and the same helpful savings tips we provide on our participant website.

That said, you might be surprised to learn that I consider our statements superior.  Why?  They are just as effective at their job - communicating 401(k) balance, return and fee information to 401(k) participants – but they cost a lot less to deliver, which helps us keep our 401(k) fees low.  I think lower 401(k) fees benefit 401(k) participants more than fancy mailed benefit statements.

A sharpened focus on 401(k) fees is changing the way 401(k) services are delivered.  Historically, onsite client visits, mailed benefit statements, and formal enrollment meetings were the norm.  Today, 401(k) providers are replacing these traditional (pre-digital) 401(k) services with lower cost alternatives.  401(k) fiduciaries should understand this trend when shopping for 401(k) services.  Traditional 401(k) services can result in valueless 401(k) provider fees that unnecessarily harm participant account returns.

Cost vs. Benefit

A growing number of 401(k) providers are delivering simple 401(k) services online to reduce costs and lower fees.  This trend is good news for 401(k) participants who value account returns more than high-touch traditional 401(k) services.

However, paying more for traditional 401(k) services is not always bad.  For example, when a workforce needs professional help to make appropriate 401(k) enrollment decisions.  When this is the case, hiring a financial advisor can be money well spent.  After all, some participants may not save at all without professional human assistance.

My advice to 401(k) fiduciaries – buy the lowest-priced competent 401k services your participants need.  Maximizing the retirement nest eggs of your employees should always be your #1 priority.

Even small fees add up

My favorite retirement savings meme is that by skipping a $4 latte each day, and instead contributing that money to a 401(k) plan, you can add hundreds of thousands of dollars to your retirement nest egg over the course of decades due to the power of compound interest.  

While this meme is often based on overly generous interest assumptions, its gist is important – even small annual fee savings can add up over time.  Assuming a modest 6% interest rate, a $200 annual fee savings over 40 years can add $35,594.18 to a retirement nest egg.  For many people, that amount can pay for an extra year of retirement!

Are traditional 401(k) services worth it?

Maximizing 401(k) participant nest eggs should be the #1 priority for small business 401k fiduciaries.  Today’s low cost 401(k) providers are making this job easier by using simple, technology-driven services to drive down 401k fees. 

There is nothing wrong with 401(k) fiduciaries paying higher provider fees when 401(k) participants receive commensurate value in return for their services.  However, fancy mailed benefit statements and other traditional 401(k) services often fail this test.  When this true, these services should be avoided in favor of less costly alternatives.

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