When selecting a 401(k) administrator for your small business, watch out for excessive or hidden fees that can chip away at the overall savings in your retirement plan.
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The Department of Labor breaks down the general categories of 401(k) fees into:
The cost of portfolio management takes up the lion’s share of the fees involved in running a 401(k). Typically, investors charge a percentage of the total assets in the plan – called an Assets Under Management (AUM) fee. While it may only be 1-3% of the plan assets, it can really erode the savings.
Opt-in fees may be charged for taking out a loan, rolling over 401(k) investments into an IRA, or requesting additional financial advisory services. These charges are paid by individual plan participants, rather than the plan at large.
Administration fees cover the cost of setting up the plan, drafting necessary documents, record-keeping, enrolling, accounting, distributing, approving loans, conducting audits, filling out IRS forms, conducting nondiscrimination testing, hosting educational seminars, customer service, and electronic plan access.
Every 401(k) needs a plan administrator to take care of the day-to-day, whether it’s a financial broker or a third-party administrator. There is no general rule governing how an administrator can charge for their services:
A median salary worker who pays just 1% in total plan assets starting at age 25 could end up paying $138,336 in AUM fees over their lifetime, according to the Center for American Progress. The amount paid by high-income earners is even higher.
Anything greater than 1% is traditionally considered exorbitant, but AUM fees can range as high as 5%. For this reason, many employers are keeping expenses down by shifting to low-cost passively-managed funds and seeking out administrators who do not charge AUM fees.
Employers can choose to pay the administrative fees themselves, shift the burden to plan participants, or share the costs.
Typically, employers pay for administrative, fiduciary, and consulting fees, whereas investment fees are often shouldered by the employees out of their plan assets.
It’s important for plan sponsors to consider their choice of 401(k) provider carefully, as many force sponsors to pay a portion of their 401(k) administrative fees out of plan assets by limiting investment options to funds with hidden revenue sharing and non-transparent pricing.
Business owners who pay the admin fees themselves benefit by:
No employer wants to be sued for failing to act in the best interest of the 401(k) plan participants. By covering administrative fees from a corporate bank account, rather than plan assets, any potential liability for overpayment is negated.
Any administration fees paid by the business are considered tax-deductible. New 401(k) plans may qualify for a 50% annual tax credit up to $5000 for the first three years of the plan. Sponsors qualify if they have:
By contrast, fees paid out of plan assets are NON-TAX-DEDUCTIBLE.
The business owner typically has the largest account balance and therefore pays the biggest chunk of administration fees. While a person with $100,000 invested may pay $1,000 in fees, the head honcho making $600,000 will be responsible for $6,000 in fees. Over time, this can really put a dent in one’s retirement nest egg. Keeping that $6,000 in the account instead allows it to grow to approximately $50,000 over 30 years (assuming a 7% annual interest rate, compounding daily).
By covering the cost of administrator fees, employers make their retirement savings plans more attractive to current and prospective employees. Providing a lucrative, low-cost 401(k) can go a long way towards attracting the best talent in your industry, reducing staff turnover, and creating a positive and productive work environment.
If you are a small business owner and need a retirement plan for yourself and your company, only Ubiquity offers flat-fee plans, plus expert guidance along the way.
We will fully customize your plan to meet the specific needs of your small business.
Looking to offer your employees the best benefits plan in a way that fits your budge? Ubiquity is happy to provide all the 401(k) information you’ll need to make an informed choice about which provider is right for you. Reach out to learn more about our 401(k) plans starting as low as $97/month.