Cost Matters - How Much Lower 401(k) Fees Can Increase Savings

There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. Equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments. This variability is a big problem for employers – who have a fiduciary responsibility to protect the interests of plan participants by paying only “reasonable” 401(k) fees. Employers that fail to meet their responsibility can be personally liable for restoring participant losses due to excessive fees.

Why does this fiduciary responsibility exist? Because cost matters a LOT when saving for retirement. When 401(k) fees are paid from plan assets, they reduce the investment returns of plan participants dollar-for-dollar. The missed compound interest on these losses can cost a participant hundreds of thousands of dollars in retirement.

Given the erosive effect of 401(k) fees, I recommend employers keep their amount a minimum. In other words, not settle for “reasonable.” Every dollar not paid by their plan means more money accruing compound interest for participants. How much these savings can increase the future value of participant accounts can be shocking.

Cost Matters When Saving for Retirement

Jack Bogle - the founder of the fund company Vanguard – is an idol of mine. I cannot think another person who has done more to help the average American save for retirement than him.

Bogle's guiding principle was simple: costs matter. Fees reduce investment returns, so their amount should be kept to a minimum to maximize the power of compound interest over time.

How Much Lower Fees Can Increase Savings

To demonstrate how much cost matters when saving for a retirement, see the table below. It shows how much Employee Fiduciary lowered the “all-in” fee (administration fees + investment expenses) of the 104 small business plans from our latest 401(k) fee study and how much the annual savings would increase a hypothetical participant’s account balance at retirement age. The following assumptions were used:

Current age

30

Retirement age

65

Current balance

$50,000

Annual contributions

$10,000

Interest rate

7%

Compounding periods

Daily

Provider

Parts(1)

Assets(1)

Provider All-In(2)

Retirement Balance

EF All-In(2)

Retirement Balance

Additional Savings

ADP

23

$583,215

1.56%

$1,386,955

0.49%

$1,834,272

$447,317

Alerus

24

$2,098,716

0.90%

$1,645,743

0.27%

$1,944,483

$298,739

American Funds

14

$444,087

1.74%

$1,322,972

0.54%

$1,809,824

$486,852

American National

11

$1,542,542

1.92%

$1,264,119

0.30%

$1,931,088

$666,969

Ameritas

10

$713,342

1.80%

$1,301,448

0.41%

$1,873,535

$572,088

Ascensus

16

$1,293,503

0.94%

$1,625,761

0.32%

$1,919,511

$293,750

Aspire

17

$869,876

1.31%

$1,478,066

0.38%

$1,887,355

$409,289

AXA

43

$2,508,235

0.97%

$1,615,638

0.28%

$1,938,412

$322,774

CUNA

30

$1,420,521

0.80%

$1,690,111

0.30%

$1,926,768

$236,657

Empower

15

$2,238,643

1.06%

$1,577,536

0.27%

$1,945,649

$368,113

Fidelity

29

$2,741,477

0.93%

$1,633,809

0.26%

$1,947,710

$313,901

Guideline

34

$196,057

1.97%

$1,247,491

0.97%

$1,613,281

$365,790

John Hancock

25

$1,889,738

1.23%

$1,508,677

0.28%

$1,938,351

$429,674

Lincoln

21

$2,841,065

1.09%

$1,567,098

0.25%

$1,954,255

$387,156

LT Trust

14

$834,435

0.42%

$1,868,194

0.35%

$1,903,609

$35,414

MassMutual

21

$684,923

1.86%

$1,281,769

0.44%

$1,860,448

$578,679

Mutual of Omaha

14

$2,668,746

1.20%

$1,521,182

0.26%

$1,952,467

$431,284

Nationwide

12

$564,615

1.97%

$1,247,452

0.46%

$1,846,034

$598,582

OneAmerica

16

$2,068,204

1.06%

$1,579,127

0.27%

$1,943,933

$364,806

PAi

37

$1,345,444

0.37%

$1,895,101

0.31%

$1,925,431

$30,330

Paychex

28

$1,077,421

0.93%

$1,632,239

0.36%

$1,896,367

$264,128

PCS

9

$568,276

1.90%

$1,269,438

0.43%

$1,861,555

$592,117

Principal

15

$822,751

1.49%

$1,411,312

0.38%

$1,887,592

$476,280

Sentinel Benefits

18

$758,973

1.06%

$1,578,688

0.40%

$1,879,876

$301,188

Sentry Life

20

$732,388

1.71%

$1,334,095

0.40%

$1,876,275

$542,180

ShareBuilder

12

$506,111

1.15%

$1,540,934

0.50%

$1,830,982

$290,048

T. Rowe Price

91

$4,950,881

0.60%

$1,782,126

0.27%

$1,946,682

$164,556

Transamerica

52

$812,311

1.03%

$1,588,908

0.46%

$1,845,916

$257,008

Ubiquity

21

$684,690

0.44%

$1,858,218

0.38%

$1,889,578

$31,360

Vanguard

12

$146,033

2.71%

$1,037,669

1.21%

$1,517,291

$479,623

Voya

17

$2,096,929

1.42%

$1,437,176

0.27%

$1,944,451

$507,275

Average

22

$1,207,267

1.18%

$1,529,926

0.33%

$1,912,307

$382,380

(1)Average of plans.

(2)Weighted average of plans based on assets.

The Lesson – Shopping Can Make Retirement More Affordable!

It can be tempting to buy a 401(k) plan from a provider you see on TV or giving into a salesperson sent by your company’s payroll provider. After all, shopping for a 401(k) plan is not going to make anybody’s list of fun things to do – most business owners just want the chore off their plate.

However, choosing the “path of least resistance” can often lead to an overpriced 401(k) plan. As our latest 401(k) fees study shows, the fees for small business 401(k) plans can vary dramatically. Taking the time to find a low-priced provider can make retirement much more affordable for plan participants down the line. Employers should settle for no less.