January 17, 2012

401(k)s: Average Small Plan Expenses Exceed Large Plans’ Costs

Investment fees drive total plan costs

Average expenses for small retirement plans are 1.3%, according to the 401k Averages Book, which published the 12th edition of its annual benchmark report on 401(k) fees on Tuesday. Expenses for large plans are slightly lower at 1.08%. The bulk of these expenses come from investment-related fees. Investment expenses account for 95% of expenses in a small plan and 98% in a large plan.

For a small plan with 100 participants and $5 million in assets, the range between the high and low total plan costs is 0.36% to 1.71%.

The book does not compare year-over-year increases in costs because “the assumed asset allocation changes every year based on what we’re seeing in the marketplace,” Joseph Valletta, partner and co-author of the 401k Averages Book, told AdvisorOne. The asset allocation used for the 12th edition is 40% large equity, 20% stable value, 9% international equity, 8% fixed income and 23% balanced.

Valletta noted that in an uncertain regulatory environment, understanding fees is crucial.

“With the DOL’s fee disclosure effective date set for April 1, knowing if your 401k plan fees are reasonable will be very important,” he said in a statement.

AdvisorOne Washington Bureau Chief Melanie Waddell reported on Jan. 5 that while the Labor Department's alleged plan to push the deadline for compliance with its 408(b)2 and 404(a) fee disclosure regulations back to April 1 have been widely circulated, a Labor Department spokesman told AdvisorOne that DOL “has not signaled” that the deadline will be extended.

“We have a high degree of confidence that the final rule mandating service provider-to-employer/plan sponsor fee disclosure will be published by the end of this month,” a DOL spokesperson told AdvisorOne in an email message on Jan. 5. “The department is sympathetic to the concerns expressed by the industry regarding the applicability dates, but has not signaled that the applicability dates will be extended.”

The 12th edition also breaks down investment costs into revenue sharing and net investment amounts. The book found that the average revenue sharing amount on a small plan is 0.68%. Net investment cost is 0.56%. This is the first year the 401k Averages Book has published these numbers.

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