#2: Small Plans Pay Much Higher Fees

People who work for smaller employers and participate in small plans pay around double the cost to invest as participants at larger plans, around 88 basis points in total compared with 41 basis points, the Morningstar report reveals.

“It is clear that the industry needs to do a better job helping these employers so that their workers have the same opportunities to save for retirement as those who work for much larger companies,” the report states. “Based on these findings, people working for employers with small plans could easily have 10% fewer assets in retirement than they would if they saved just as much and worked for an employer with a larger plan.”

Small plans also feature a much wider range of fees between plans, with more than 30% of plans costing participants more than 100 basis points in total. Further, many plans are still outliers, with unusually high fees relative to their peers, particularly outside of the largest thousand or so plans. “In short, the U.S. system does not work nearly as well for people who are not fortunate enough to work for larger, established employers. Congress recently created pooled employer plans, which could help close this gap somewhat, but so far there has been little uptake,” the report states.

Not all small plans are expensive. Some employers with small plans report total costs that are competitive with larger plans. In fact, 23% of small plans cost participants less than the median cost for medium plans of 63 basis points.

Medium plans are less likely to consistently offer a good deal to their participants than larger ones. More than 20% of medium plans have total costs of more than 80 basis points, compared with just 1% of mega plans.

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