Why don’t more small businesses offer a 401k to their employees? This might be the reason.
Despite a heavy industry focus on fees and fiduciary responsibility to ensure they’re appropriate—backed by the increasingly real threat of legal action—roughly three out of every four small business 401k plans are being charged hidden fees by their provider.
These hidden fees cost plan participants in a recent study an average of $228 every year, according to Employee Fiduciary, LLC.
When factoring in compound interest, this can result in hundreds of thousands of dollars in lost returns over several decades of retirement saving, the company added.
Predatory and unacceptable
“These hidden 401k fees are predatory and unacceptable,” Eric Droblyen, President and CEO of Mobile, Ala.-based Employee Fiduciary, said in a statement. “We are on the verge of a retirement crisis. More than half of working-age households are at risk of having inadequate retirement savings, and these hidden fees are a big reason why.”
During the study, Employee Fiduciary made the following observations:
- The 1.18% all-in fee average was quite a bit lower than the 1.40% average found in its 2018 study, while the $445.43 per-capita admin fee average was about the same ($422.30 in 2018).
- 96% of plans paid “hidden” administration fees.
- Six of the top 10 highest-priced 401k providers in terms of per capita administration fees also ranked in the top 10 based on their percentage of hidden fees.
- Nine of the top 10 highest-priced 401k providers in terms of per capita administration fees were insurance companies.
- 401k administration fees should be evaluated on a per-capita basis to best ensure their reasonableness.
“Our goal is to help plan sponsors avoid the predatory fee practices used by many 401k providers,” Droblyen concluded. “While hidden 401k fees help these providers pay their CEOs millions of dollars every year in bonuses, they may force small business owners and their employees to delay retirement by several years just to reach their savings goal. If you ask us, that just isn’t fair.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.