What you’re *really* paying for your 401(k) — and how to pay less

Tiffany Meyers

As a business owner, you likely know exactly how much you’re spending on things like office space, payroll and benefits. But do you know what you’re paying for your 401(k)?

“Most people don’t, because the 401(k) has not historically been the most transparent vehicle,” said Certified Financial Planner Sean Condon, a wealth advisor at Windgate Wealth Management. “When I ask people if they know what they’re paying, they typically say they have no idea, which is a problem. But it’s worse when they say, I’m not paying anything.”

In fact, you’re being charged a variety of fees. When those fees are high, your employees’ retirement savings will take a hit, especially over time. And as the well-compensated company owner, who can make large contributions into the 401(k), these fees could take a significant bite out of your savings.

Luckily, there are a few things you can do to get a grip on fees. Condon recently told us how.

Find out what you’re paying
Fee size is based on various factors, like the number of people in the plan, the provider administering the plan, and the type of investments. Historically, the fine print has made it extremely hard to find out what you’re paying. Thanks to new Department of Labor regulations, however, it’s become easier. The provider is now required to supply a 404(a5) disclosure, clearly laying out fees.  

“This is a major opportunity to lower fees, potentially drastically,” said Condon. “The fees are no longer hidden in the weeds. And now that people know what they're paying, they can finally shop around.”

Ask your plan provider for your 404(a5) disclosure. Then take it to a financial advisor with a fiduciary obligation to act in your best interest. They will compare what you’re paying to the industry average.

Understand managed funds vs index funds
One significant 401(k) fee is the investment management fee, a charge for each investment in your plan. This is largely based on whether you offer low-fee index funds or actively managed funds. So you’ll want to know the difference.

With managed funds, you might pay a fee of 1 to 2 percent of the total plan size, annually, for an advisor to choose investments with an intent to outperform the market, all while earning a commission. If that sounds small, consider: With a 1 percent fee, you’ll lose $5,000 annually if you have $500,000 in savings. Over 20 years, that’s a hefty sum.   

Low-cost or indexed funds aim to match the average return of the stock market and the fees can be as low as 1/10th of 1 percent. According to a Vanguard study (Vanguard Low Cost Can Actually Mean More for Retirement, 2015), participants in a plan consisting of low-cost investments end up with $216,000 more in retirement than the industry average.

“The best bet, for most people, is to work with an advisor to set up a diversified investment lineup of low-cost, indexed options,” said Condon. “The cost savings gets passed down to your employees who are doing their best to save for retirement.”

Know your responsibilities
No matter the funds you choose, a 401(k) is not a set-it-and-forget-it proposition. The Department of Labor recommends companies  benchmark their plan every three years — a process a financial advisor can manage — to demonstrate that the fees are reasonable.  

It’s not just informational. If a financially savvy employee questions a fee as higher than average, you’ll want to stave off any possibility of legal action by saying: We did a benchmark and therefore know that this fee matches industry standard.

When to start a 401(k)
A safe harbor 401(k), in which you guarantee a match for employees, has a deadline of October 1. There is no deadline to set up or replace a standard 401(k), although January 1 is a common date to do so. Learn how to launch a 401(k) now.    

 

Photo via Shutterstock.

Windgate Wealth Management designs company retirement plans, including 401(k)s, and offers financial wellness benefits to provide for employees, increase personal wealth and reduce tax liability. Learn more

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