Transaction Fees Surpass Budgets for Small Businesses
Most small to midsize businesses (SMBs) are being systematically charged for unanticipated fees related to retirement accounts, including those enrolled in pooled employer plans (PEPs) shows new findings from Human Interest.
According to a report by the firm, 63% of SMBs report paying expenses they did not expect when selecting their current plan provider, including transaction fees, administrative fees, and service fees. Specifically, many did not plan for mandatory or standard administrative costs like charges for auditors and ERISA counsel, value-add services such as fidelity bond and compliance support, and routine plan expenses.
In its research, Human Interest called on the need for transparent pricing, especially for businesses who report smaller revenue streams. Small to midsize businesses are likelier to report higher fees as a motive for refusing to offer a workplace retirement plan, as employers say that such costs could eat away up to 60% of total plan expenses. A majority of employers surveyed (73%) point to fees for driving up the overall cost of their benefits program, which has forced participants for 63% of plan sponsors to withdraw from the plan.
Some plans are forced to cancel their retirement plan because of the unforeseen costs.
“Small and medium-size businesses are being nickel-and-dimed for every retirement plan transaction, distribution, and plan event,” said Rakesh Mahajan, chief revenue officer at Human Interest. “Transaction fees add up — in administration time, in cost, and in confusion for employees. These employers are the key to better retirement security for American workers, and should not be treated like a revenue stream. Transparent, predictable pricing is the standard the industry should be held to.”
PEPs prove costlier for some
While PEPs are marketed as a simpler and cost-effective option for small businesses wanting to offer retirement benefits, Human Interest’s research shares that some continue to pay more in fees.
A greater number of PEP sponsors reported paying unexpected fees compared to 401(k) employers (89% vs. 53%). Small businesses in PEPs also spent about 65% more in total annual costs than 401(k) sponsors.
While PEPs were designed to reduce specific costs like those associated with ERISA counsel, 24% of small business owners surveyed said they hired such professionals when implementing their retirement plan.
Others spend their time overseeing fees, which could eat up potential business profits. According to Human Interest, based on the average salary reported in the survey, small business owners spend $12,870 a year managing fees instead of running their business.
“The PEP market was founded on the promise of simplicity and cost efficiency — but that’s not what’s happening. Our data suggests that SMBs in PEPs are reporting higher total costs and more administrative burden than many may expect, including ERISA counsel costs that PEPs are designed to reduce,” Mahajan said.
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with nearly a decade of experience and a passion for telling stories and reporting news.