The overall message in a recent article regarding declining 401k fees is positive. However, it notes the following:
“Reflecting economies of scale, the average cost for a micro plan (10 participants and $500,000 in assets) is 1.85 percent, while the small plan and large plan averages are 1.25 percent and 0.96 percent, respectively.”
The article then quotes David Huntley, co-author of the 401k Averages Book.
“Although 401k fees have been declining, if you work for a small company you’re probably paying higher fees in your 401k plan. Even with small companies paying more attention to their plan fees it’s still more costly to deliver the services to a small number of participants.”
Huntley is certainly speaking factually. We see hundreds of fee disclosures every month that go way beyond 1.85 percent for plans this size.
However the notion being fed to plan sponsors that this is just how it is, that they don’t have any buying power, that they don’t “qualify” for lower fees, simply needs to stop. This is not an advertisement for my company, America’s Best 401k. Yet on this same plan the annual cost of administration, recordkeeping, participant and 3(38) advisory fees, and the average expense ratios of the core fund lineup is less than 1 percent.
The total investment-related fee portion is just 0.65 percent. It’s not just that it can be done, it’s also the right thing to do. It’s not our 401k plan, it belongs to the participants. The commissioned, broker-driven (insurance company) or national payroll company 401k plans with pay-to-play fund line-ups …they all think it’s somehow their plan.
The financial services industry could do the same thing we, and other like-minded companies, do—it’s not hard. It just doesn’t want to. Thirty-plus plus years of 401k plan assets lining their pockets; not having to put the interests of the client and participants in front of their own; not having to serve in the role of a fiduciary; and now fighting the proposed increased fiduciary standard tooth and nail—there are no changing those stripes.
And all those the employees busting their [hump] over many years and socking away what they can from their paycheck are sadly oblivious of the erosive effects of fees over time. They retire, look at their 401k balances and think, “is that all there is? What happened to those years of contributions, how did my savings not grow more?”
It’s not the 401k plan that is bad, or that your fees are too high. The problem is the choice of providers, and the baggage they bring with them.
If you are a plan sponsor of a small 401k plan, get the facts, but resolve to no longer accept them. There is no reason—none—that you cannot have a 401k plan with extremely low expenses.
One last point regarding the investments and investment-related fees within a 401k plan, taken from Warren Buffet. His most recent letter to his shareholders addressed the billions of dollars lost to high-cost investment options.
If Warren Buffett recognizes that his billionaire friends losing money by not investing low cost index funds, why do most 401k plans have fund lineups and added asset-based fees designed to ensure retirement savings enrich the broker, record keeper and fund companies?
More importantly, why do we willingly accept it?
In large part because of a lack of emotion related to money in the present tense, and a lack of interest in basic financial acumen.
‘We never worry about our money …until we do.” We’d better start worrying now, especially if we want to live a secure and dignified retirement. It’s how we accumulate and invest that will sustain us, so we darn well better not accept the facts presented in the article. And we darn-well better set out to then change the facts to meet our needs.
Tom Zgainer is CEO and founder of America’s Best 401k, which has a proprietary 401(k) fee checker tool.
Tom Zgainer is Founder and President of Sales of AB401k, a Creative Planning offering.
