As all eyes have focused on lowering the fees associated with participating in employer sponsored retirement plans, like 401k’s, participants in larger plans have benefitted the most from cost reductions. Can automation, well applied, pave the way for price relief benefitting participants at smaller businesses?
Smaller Plans, Bigger Fees
Unnecessary retirement fees, add up over the years, and make a real difference between retiring successfully or not. That’s why, as James Van Bramer at Plan Sponsor puts it: “In the retirement industry, few words hit harder than “fees.” Whether a plan sponsor, a retiree or a plan participant, the word spells bad news and, in many cases, litigation.” Intense focus on fees in recent years has led to some relief for participants, but that’s been generally limited to retirement plans sponsored by large companies. As Plan Sponsor sums up the situation, smaller plans face bigger fee problems:
- For employers with less than $10 million in assets, the fee balancing act, for many reasons, becomes more difficult. According to a Morningstar analysis, about 15% of small plans face annual 401(k) expenses of greater than 1.4% of plan assets, whereas bigger plans often keep their expenses to less than 1% of their assets.
- Employees at smaller plans end up disadvantaged, as shown in a 2024 study by the Consumer Federation of America, which found that workers participating in an average-cost plan with less than $1 million in assets for 40 years could retire with approximately $292,000 less than if the same worker participated in an average-cost plan with at least $1 billion in assets. The small-plan worker would need to hold off retirement for an average of four and a half years to catch up because, as fees increase, the gap workers in smaller plans need to cover increases.
It stands to reason that technological advancement should enable increased automation related to retirement plan administration, and, at least in theory, reduce fees for even the smallest of employer sponsored retirement plans. Of course, leveraging automation to reduce fees requires a high level of intentionality. Relatedly, Plan Sponsor highlights this example:
Human Interest Inc. offers 401(k) services to more than 35,000 small businesses, with many containing assets of $10 million or less. To lower its fees, which Chief Revenue Officer Rakesh Mahajan says helps attract more potential clients, Human Interest does not charge for plan loans and does not charge transaction fees. Human Interest accomplished this, Mahajan says, by using technology. “The difference is: I use technology every chance I can to automate,” he says. “100% of our loans—fully automated. No human beings touch them.” According to Mahajan, the efficiency of automation has allowed Human Interest to lower and eliminate fees for small businesses. In doing so, the company is able to expand the investment options available to these small businesses.
Good To Know: Exactly What Are We Paying?
Clarity around fees is a major concern for retirement plan sponsors, given their fiduciary obligations to participants. To that end, periodically benchmarking the fees and services associated with the plan is essential–and required by the Department of Labor. To get started, make sure you understand all the fees you are paying. The Department of Labor (DOL) publication, A Look At Plan Fees, offers a helpful place to start. Essentially, there are three categories of 401k fees:
- Administrative fees: Include customer support, recordkeeping, and legal services. Depending on your plan, employers may cover 401(k) administration costs, or you may pass them on to employees as flat fees or as a percentage of the assets in the plan (which makes plan sponsors liable for these fees).
- Investment fees: Charged to plan participants as a percentage of fund assets. Plans can invest differently, including managed investment funds (although mutual funds may be more cost-efficient than target-date funds). Because expense ratios cover the operating costs of funds relative to a participant’s assets, it’s wise to consider low-cost funds and watch out for hidden fees….
- Transaction fees: Some providers charge plan participants fees for utilizing specific plan features such as loans, hardship withdrawals, financial advisory services, and more. Individual service fees can reach up to $500 per transaction, depending on the reason—although some providers don’t charge any transaction fees.
With clarity on plan fees in hand, benchmarking the costs of the company sponsored plan against the field becomes relatively straightforward, and there are tools available to assist. For example, many plan sponsors find the 401k Averages Book a useful resource for determining if the plan fees are above or below what is typical. As a fiduciary, remember that benchmarking alone is insufficient toward fulfilling your obligations under the high standards of ERISA law: you must also act decisively if the fees and services are not in the best interest of participants. Documentation of both the benchmarking process, and the resulting decisions and actions is also essential. Be careful: navigating the complexities of ERISA–and related litigation–brings up challenges all the time, and seemingly small oversights can result in costly disruptions to businesses. In fact, the average ERISA claim costs businesses like yours over $1.2 million in legal fees.
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