According to the report, most 401(k) studies are based on publicly available data required to be filed by plans with 100 or more participants. But this means that data from approximately 533,000 401(k) plans that have fewer than 100 participants are excluded.
As a result, the report says, most studies could be overestimating the impact upon small businesses and their employees of broader industry trends such as the lowering of fees or greater access to low-cost index funds.
Looking at the asset-based fees charged to those smaller plans, America’s Best 401k concludes that many small business owners and their participants are overpaying for their 401(k) plans.
An industry report at the end of 2016 cites a median cost for plans with 100 participants or more, and $1 million or more in assets, of just 0.93% of plan assets per year, with the rate dropping sharply as assets exceed $10 million and more to as low as 0.27% of plan assets per year.
However, when it comes to small plans, that’s not the case at all, according to the report; in fact, fees run considerably higher, and in the case of one provider nearly hitting 2% of plan assets.
The study focuses on asset-based fees, including average mutual fund expense ratios, broker and advisor compensation, recordkeeping and custody fees, and any contract asset or account maintenance charges deducted as a percentage of the plan balance. It says that because these are taken directly from the participants’ accounts, they have the greatest effect upon their long-term financial security.
The report also notes that most of the plans studied had limited or no access to index funds, relying instead upon actively managed funds, which are substantially more expensive than index funds and typically have revenue-sharing arrangements with plan providers. Many large providers limit access to index funds until plans reach a certain asset level, or provide access after including significant markups to their retail expense ratios.
“Until now, there were few extensive studies of plans with fewer than 100 participants,” Josh Robbins, chief strategy officer of America’s Best 401k, says in the report. Robbins adds, “Excessive fees can take between $150,000 and $275,000 from the average American worker over the course of their working life, depending on their income and saving rate—money that otherwise could have helped to fund a more comfortable retirement. So even a slight reduction in fees can yield tremendous benefits to plan participants.”
The report points out that over a 20-year span, a typical small-business plan with a starting balance of $2 million, annual contributions of $250,000 and annualized performance of 7% that cuts annual fees by one percentage point can realize as much as $2.5 million in recouped retirement savings that would have otherwise been lost to fees.