If you’re a small business owner offering a 401(k) plan, it probably feels good to know that you’re helping your employees save for retirement while also planning for your own future and lowering your personal taxes. But you should understand how much you are spending on that plan – and if more than one percent of your 401(k) plan’s assets are going to fund investment fees, you may want to shop around.
Here are some guidelines to consider that may help determine if you’re paying a fair price for your 401(k) plan or if it’s time to think about making a change.
Understand What’s Reasonable (Hint: Investment Fees Should Be Under One Percent!)
Overall, there remains a lack of awareness among small business owners when it comes to what is a sensible price to pay for your plan, and how those fees can impact your nest egg over time.
ShareBuilder 401k’s 2013 survey of small business owners revealed that owners who read their fee disclosure statements still consider three percent (on average) to be a reasonable price to pay for their plan. Remember, every dollar you pay in fund and investment expenses is one less dollar that remains invested in the market. In this case, less can definitely be more.
ShareBuilder 401k – a 401(k) plan provider that specializes in online-managed, ETF-based 401(k) plans for small to medium-sized businesses – advocates that employees pay no more than one percent in all-in fees because the difference of just one percent can significantly impact how much is ultimately saved for retirement. Over the course of a 40-year career, the difference between one or two percent in fees can translate into hundreds of thousands of dollars in lost retirement savings.
Read Your Annual 401(k) Fee Disclosure Statement
How much are you currently paying? If you aren’t sure, you have access to a number of resources that can offer education on your plan costs and the low-fee options available to you and your employees.
Start with your fee disclosure statement. Each year, 401(k) plan providers send out annual disclosure statements to each plan sponsor (you or your company is considered the plan sponsor) in the spring and no later than June 30th.
Review the statement to find the percentage of “all-in” fees, which you can calculate by taking the total amount of investment fees and dividing it by the plan’s total assets. Some disclosure documents are clearer than others so you’ll want to make sure you include all fees in your calculation.
This will include the expense ratios of funds offered (use the average expense ratio of most used funds if an average expense is not provided) and may also include administrative expenses, custodial expenses, asset management expenses, or even a wrap fee.
When you add these up, what figure did you get? This represents the percentage you’ll be charged on your plan’s total balance. Every employee is paying this percentage on the amount that they have invested in their 401(k).
If you’re currently paying more than one percent in all-in fees for your plan, you have the option of contacting your plan to negotiate a lower rate. If that doesn’t work, it may be time to speak with other plan providers. Small business owners have the option to negotiate and shop around to get exactly what they need. In fact, our 2013 survey found that 35 percent of small business owners negotiated with their current provider after reviewing their 2013 disclosure documents, and 34 percent benchmarked their data to compare their plan with others.
Establish a Benchmark and Compare Costs
After you’ve identified the percentage of fees charged by your current provider, you can also compare it to the current industry average. The 2013 Deloitte/ICI Defined Contribution/401(k) Plan Fee Survey found the number of plan participants and average account balances were key factors in determining all-in fees. The more participants and the higher their average balance, the lower the fees charged. For example, the median all-in fee for plans with assets between $1 million and $10 million was 1.27 percent, while it was 0.37 percent for plans with more than $500 million in assets.
Once you’ve calculated the fees within your current plan and have compared them to the industry average, it’s time to benchmark the costs of your 401(k) plan against other available plans. This free online cost comparison tool makes it easy to quickly compare and contrast plans using different criteria, including fees.
Consider Index Funds
If you decide to look for a more affordable 401(k) plan provider, you’ll want to make sure that plan offers a variety of low-cost investment options like index ETFs, which are baskets of stocks that track a specific index (like the S&P 500). Index ETFs tend to offer low expenses, a broad array of asset categories, and fee transparency. They are like index mutual funds (which also tend to have lower fees) in that they track the make-up of a market index but can be traded throughout the day like a stock.
Focus on the Goal of Financial Freedom
Remember, the more knowledgeable you become about 401(k) fees and their impact on your retirement savings, the better responsibility you can take for your future and the future of your business.
For more information on making sense of your 401(k) fee disclosure statement, visit the Department of Labor’s page Understanding Your Retirement Plan Fees.
This should not be construed as tax or financial planning advice. You should always confer with your accountant or financial consultant before making a decision about retirement planning for yourself or your company.
Capital One does not provide, endorse, nor guarantee any third-party product, service, information or recommendation listed above. The third parties listed are not affiliated with Capital One and are solely responsible for their products and services. All trademarks are the property of their respective owners.
Powered by Spark
Securities are offered by Capital One Investing, LLC, a registered broker-dealer and Member FINRA/SIPC. Advisory services are provided by Capital One Advisors, LLC, an SEC registered investment advisor. Insurance products are offered through Capital One Agency LLC. All are subsidiaries of Capital One Financial Corporation.
ShareBuilder and Capital One ShareBuilder are marketing names for Capital One Investing, LLC. ShareBuilder 401k and ShareBuilder Advisors are the marketing names for Capital One Advisors, LLC. Spark Business and ShareBuilder Advisors, LLC are separate but affiliated legal entities and are each responsible for their own products and services.
Securities and services are: Not FDIC insured • Not bank guaranteed • May lose value • Not a deposit • Not Insured by any Federal Government Agency
 The ShareBuilder 401k Disclosure Survey was conducted by Wakefield Research among 500 small business owners and decision makers offering 401(k) plans at companies with 100 employees or less, between November 19th and December 2nd, 2013.