(Bloomberg Business) — How good is your retirement plan? This Bloomberg data visualization lets you figure that out by comparing your plan to those offered by the largest companies in the U.S.
If you work at a small company, you’re likely to have a lousy 401(k). Small plans often charge savers fees five or six times as great as those workers at large companies pay.
But it’s no longer necessary for workers to be stuck in these high-cost 401(k) plans. Cheaper plans are rapidly signing up new employers and 401(k) fees for even the smallest businesses are plunging.
Smaller companies pay more for 401(k) plans because of the costs of setting up and administering the plans. These companies don’t have the option of spreading the costs out over thousands of workers.
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Smaller businesses are also less likely to have an employee who knows how to set up a 401(k). The same person who chooses the retirement plan provider may be doing payroll or ordering supplies. They might have no idea of how to pick a fund provider.
So small businesses pay a wide range of fees. While the average small 401(k) pays annual fees of 1.5 to 2 percent of its assets, data from BrightScope show that some small plans pay less than 0.5 percent a year and others pay more than 3 or even 4 percent. Even a fee of a couple of percentage points “makes investing prohibitively expensive,” BrightScope President Ryan Alfred warns. “The sheer number of plans paying north of 2 percent a year in fees was shocking to us.”
If you don’t think two percentage points will make a big difference to your retirement, check the math. Say you invest $10,000 in a 401(k) that returns 6 percent a year, in a plan with a 1 percent fee. Two decades later, you’ll have $26,000 in the plan. In a plan that charges a 3 percent fee, you’ll wind up with just $17,440.
Business owners might pay more attention to these fees if they were coming directly out of the company coffers. Instead, the fees are often passed on to workers in the form of higher mutual fund expenses.