America's Best 401k Study: Small Businesses Overpay for 401(k) Plans

Small Plans Account for 90% of the 401(k) Market, but are Ignored by Most Studies

News provided by

Dec 13, 2017, 10:21 ET

SCOTTSDALE, Ariz., Dec. 13, 2017 /PRNewswire/ -- The vast majority of 401(k) studies rely upon publicly available data that plans with 100 or more participants must file. But this data excludes 90% of the approximately 533,000 401(k) plans in America that have fewer than 100 participants. So most studies may be overestimating the impact upon small businesses and their employees of broader industry trends such as the lowering of fees or greater access to low-cost index funds.

America's Best 401k took a closer look at the asset-based fees paid by small business owners and their employees and found that many overpay for their 401(k) plans.

"Over the past five years, we've received thousands of fee disclosures from virtually every provider in the industry and found that the total costs paid by 401(k) plans with fewer than 100 participants are substantially higher than those reported in most industry studies, which focus upon plans with more participants and more assets," said Tom Zgainer, CEO and Founder of America's Best 401k.

The industry has reported (on page 50 at the link here) a median cost for plans with 100 participants or more, and $1 million or more in assets, of just 0.93% of plan assets per year, with the rate dropping sharply as assets exceed $10 million and more to as low as 0.27% of plan assets per year. It's a different story for small plans, according to America's Best 401k's new white paper: fees are considerably higher, nearing 2% of plan assets per year in the case of one provider.

America's Best 401k's white paper, "Fees Run High for Small Business 401(k) Plans," focuses upon asset-based fees because these are taken directly from the participants' accounts and have the greatest effect upon their long-term financial security. Asset-based fees include 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 plan balance.

"Until now, there were few extensive studies of plans with fewer than 100 participants," said Josh Robbins, Chief Strategy Officer of America's Best 401k. "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," he added. "So even a slight reduction in fees can yield tremendous benefits to plan participants. The 401(k) is an incredibly valuable tool when used correctly and especially when prioritized for the primary benefit of participants, not providers."

America's Best 401k's white paper also notes that most of the plans studied had limited or no access to index funds, relying instead upon actively managed funds, which are substantially more expensive than index funds and typically have revenue-sharing arrangements with plan providers. Many large providers limit access to index funds until plans reach a certain asset level, or provide access after tacking on significant mark-ups to their retail expense ratios.

One plan reviewed by America's Best 401k offered the Vanguard Total Stock Market Index Fund for 1.61% annually when the true direct cost from Vanguard was just 0.05%—a 3,120% mark-up. In other instances, insurance company providers put the 401(k) plan into a group annuity contract, which creates significant additional expenses not found in traditional 401(k) plans.

Many small business owners and their employees aren't aware of the long-term impact of fees. Over the course of 20 years, a typical small business plan with a starting balance of $2 million, annual contributions of $250,000, and annualized performance of 7% that cuts annual fees by one percentage point can realize as much as $2.5 million in recouped retirement savings that would have otherwise been lost to fees. Assuming all things are equal in terms of performance, any reduction of fees goes directly into the pockets of plan participants in the form of higher account balances, which leads to greater financial security for both the owner and employees.

About America's Best 401k

We are disruptors. We remember what most plan providers have seemingly forgotten: the money in 401(k) plans is the possession of real people. People with families that deserve to have the benefits of the money they have had the discipline to sock away. In a sense, we are freedom fighters. Freedom from expensive 401(k) plans and underperforming investment options. America's Best 401k offers plan sponsors and participants freedom from expensive 401(k) plans and underperforming investment options. For more information, visit americasbest401k.com.