Fees are purging millions from small businesses’ 401(k)s
Significantly higher fees are robbing the retirement troves of the vast majority of America’s 401(k)s.
The pension industry likes to promote a super-low median fee of just 0.27% per year, but the problem is that it only applies to the plans of the select few businesses with more than 100 participants and $10 million in assets.
The median fee jumps to 0.93% for businesses with more than 100 participants and $1 million in assets, and even higher to about 1.4% for the vast 90% of businesses that have 401(k) plans for fewer than 100 employees, according to a new white paper by America’s Best 401k, Fees Run High for Small Business 401(k) Plans.
Most 401(k) providers withhold low-cost index funds from the options these small businesses can choose for inclusion in their 401(k) plans, further draining their employees’ retirement accounts. Over the last 15 years, fewer than 20% of active managers beat the benchmark index for their fund, the study explained – and one provider hiked the 0.05% fee of its Vanguard Total Stock Market Index Fund by more than 30 times to 1.61%.
“Excessive fees can take between $150,000 and $275,000 from the average American worker over the course of their working life, depending on their income and saving rate — money that otherwise could have helped to fund a more comfortable retirement,” America’s Best 401k chief strategy officer Josh Robbins said.
The study focused on 11 different 401(k) providers whose fees varied from 1.19% to 1.95%, with the sponsor’s own offering at 0.65%. It looked at only asset-based fees that are taken directly from retirement account balances, including average mutual fund expense ratios, broker and advisor compensation, recordkeeping and custody fees, and any contract asset or account maintenance charges deducted as a percentage of the balance.
If fees were 1% less, a small business 401(k) plan that started with $2 million and added $250,000 a year, while growing 7% annually, would save $2.4 million over the course of 20 years.
Not only do you want to maximize your retirement savings, but it may also be helpful to leverage your retirement funds for unexpected needs. In that case, consider whether a 401(k) loan might be a good option for you by learning more and comparing them against other alternatives, like secured personal loans.