There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. Equally competent 401(k) providers can charge extremely different fees for similar administration services and investment packages. This variability is a big problem for employers who have a fiduciary responsibility to protect the interests of their employees by paying only “reasonable” 401(k) fees. Employers that fail to meet this responsibility can be personally liable for restoring participant losses due to excessive fees. However, there is a large difference between “reasonable” and good. Additionally, employees that participate in these plans are losing out on their hard earned money.
So why is this fiduciary responsibility existent in the first place? Because cost is extremely important when saving for retirement. When 401(k) fees are paid from plan assets, they reduce the investment returns of plan participants. Keeping it simple, the more you pay in fees the less money ends up back in your pocket and the pockets of plan participants. Over time, this missed compound interest can cost a participant hundreds of thousands of dollars when it comes time to retire.
Considering the negative impact of 401(k) fees, I recommend that employers keep their amount as low as possible and employees barter for the lowest fees they can get. In other words, do NOT settle for just reasonable fees. Every extra penny paid in fees means less compound interest for plan participants. Even just lowering these fees slightly can drastically increase the future value of retirement savings.
Companies such as Td Ameritrade and Vanguard have gone above and beyond when helping Americans save for retirement. Their philosophies are simple: costs matter. The higher the fees, the less investment return, so this amount should be kept at a minimum at all times to maximize the power of compound interest.
The Lesson – Shopping Can Make Retirement More Affordable!
As a business owner, it is tempting to buy a 401(k) plan from any provider you see online or any sales person sent by your company’s payroll provider. After all, shopping for a 401(k) plan is not going to make anybody’s list of fun things to do – most business owners just want the chore off their plate.
However, choosing the “path of least resistance” can often lead to an overpriced 401(k) plan. As our latest 401(k) fees study shows, the fees for small business 401(k) plans can vary dramatically. Taking the time to find a low-priced provider can make retirement much more affordable for plan participants down the line. Employees and Employers should settle for no less.