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Why small business retirement plans with high asset balances actually pay more for their plan services.

Greg Carpenter

December 28, 2022


Let’s compare two small business 401k plans and you tell me which company is getting the better deal.

Both companies have 50 employees and exactly the same plan provisions. Each company makes biweekly payroll contributions and each has the same employer match provisions. Same recordkeeping services right across the board.

Company 1: Pays 0.78% (78 basis points) for recordkeeping services.
Company 2: Pays 0.27% (27 basis points) for recordkeeping services.

Company 2 has the better deal, right? Wrong.

Company 1 has only $300,000 in assets and is paying a total of $2,340 for its recordkeeping services. Company 2 has $3 million in assets and is paying a total of $8,100 for its identical recordkeeping services. Company 2 is paying over three times more in actual dollars for the same service.


Beware asset-based fees in small business retirement plans

Both companies are paying a flat $2,100 plus an asset-based fee. The asset-based fee for Company 1 is 8 bps. Company 2 is paying 20 bps. Because of the difference in total assets, the flat portion of the fee seems disproportionately higher for Company 1. What is missing is how Company 1’s fees will change over time as assets increase. At $3 million in assets, Company 1 will be paying only 12 bps in total fees – less than half of what Company 2 is currently paying for the exact same services.

The financial services industry is dominated by large corporations that get paid asset-based fees. The more assets they gather, the more they revenue they generate. These firms in turn dominate the financial media. They churn out studies and cost comparisons that invariably reduce cost benchmarking to a percentage of plan assets. And they lump all small business 401k plans together regardless of the nature of the business. Check out the studies from the mutual fund companies’ trade organization, the Investment Council Institute. I’m not saying that any of this work is inaccurate, it just reflects the perspective of the industry. And that perspective leaves small business owner scratching their heads on how to best benchmark costs.

As I blogged earlier, we need an “all-in” fee to allow smaller plans to have a level playing field when evaluating fees and services. It is the only clear and effective way to evaluate small plan providers.

Are you paying asset-based fees?

Asset-based fees can become problematic as assets increase. Fixed rate asset-based fees can explode costs as assets grow. I advise you to check your plan fee disclosure to determine what portion of your service fees are asset-based. Then calculate how much those fees will be two and five years down the line as plan assets grow. If those future numbers look scary, it may be time for a plan makeover.

Beware especially of variable annuity products. They have typically high asset-based fees – some in excess of 2% of assets. These fees are modest in the first few years of a plan (when assets are low), but the total dollar fee can become outrageous if and when assets grow quickly. We recently reviewed a plan paying out over $90,000 in asset-based fees on total assets of $2 million!

If you need help in interpreting your fee disclosure, let us know. We would be pleased to walk you through the document for no charge.

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