If you’re offering your employees a 401(k), you’re providing them a great retirement benefit. However, in our employee education and enrollment meetings, I’ve found that many employees mistakenly think that their 401(k) is free, not realizing they pay plan administration fees, and sometimes even fees on certain investments, out of the money they contribute.
Understanding and knowing what fees you pay is a big part of smart, financial planning, as even a small fee can greatly impact the amount of money one accumulates.
Therefore, it’s important to check your 408(b)(2) fee disclosure to make sure you’re aware of what your plans fees are. Consider the below example by the United States Department of Labor:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.[i]
As we wrote about last week, employers who offer a 401(k) plan have a fiduciary obligation to monitor the fees that employees pay. Yet, even more than their fiduciary obligation, employers should consider the impact fees can have on their employee’s ability to save for retirement (and their own ability if they contribute to the plan).
In my experience, many employers often don’t understand fee disclosures or are unconcerned with their current plan. However, it’s important for employers to continually monitor their plan to make sure they have the lowest fees possible. While their current plan provider may have been the best option a few years back, increased plan assets and marketplace changes may result in lower fees with another provider today.
For example, we were recently able to save .75% in fees for a 401(k) plan client by comparing their current plan fees to proposals from different providers. While .75% many not seem like a lot, if an employee currently has $200,000 in the plan and contributes $5,000/year, the .75% would result in savings of:
$17,000 in 10 years
$40,000 in 20 years
$102,000 in 40 years
If the entire plan has $2,000,000 in assets and contributions total $50,000/year, the .75% would result in savings of:
$178,000 in 10 years
$417,000 in 20 years
$1,032,000 in 40 years
I admit fee disclosures can be tricky, with fees hidden even for someone looking for them. However, having an advisor who can help you translate fee disclosure documents and analyze the impact the fees have on you and your employees can be a huge help to achieve your fiduciary obligation.