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Small Business Owner or Employee? Make sure you Understand 401k Fees

This is a guest post by Tom Zgainer, Vice President of Corporate Retirement Plans at Personal Capital.

A recent study found that the average total cost for a small retirement plan declined from 1.47% to 1.46% over the past year, and that investment expenses average 1.37%. This particular study defined small plans as those with 50 participants or $2,500,000 in assets.  But if you own or work for a business that has fewer than 50 participants or less than $2.5 million in assets, odds are you’re paying a substantial amount in 401k fees.

Plans with less than $2 million in assets are defined as “micro” plans. It is not uncommon for the underlying investments in these plans to have expense ratios averaging between 1.50% and 2%. This has a major impact on retirement savings over time.

A basic 401k plan without complex profit sharing options can cost $1,000 to $2,000 per year. This doesn’t seem like much, but you get what you pay for: at the low end of this spectrum you may be limited a small list of investment options, without access to a Roth 401k, auto enrollment or auto escalation. Odds are there are no brokerage options and no live customer support.

If you’re looking for a low-cost, high-value plan, it’s important to carefully consider plan vendors. Many small businesses have basic plans that have no real strategic design. All too often, these plans are sold by brokers who get paid on commission, thanks to high-cost investment options, and are contracted with local third party administrators with inconsistent fee schedules.

Small business owners should instead shift their search to open-architecture providers who proved administration, recordkeeping and investment access. These plans tend to have lower fees overall and offer non-proprietary investments.

401k plan sponsors have a fiduciary responsibility to provide the best plan possible for participants. If you are a small business owner and would like Personal Capital to benchmark your plan for free, please click here.

Want to know how many years you could be losing in retirement as a result of high 401k fees? Sign up for Personal Capital, link your 401k account and run our free 401k Fee Analyzer for a complete picture of your retirement savings.



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