What to Be Aware of With 401(k) Plan Pricing
Dylan Telerski / 26 May 2020 / 401(k) Resources
When Ubiquity began in 1999, we were the pioneer of small business retirement planning.
Traditionally, 401(k) plans provided by legacy institutions were designed and priced for large businesses. Over the last few decades, smaller companies have accounted for more and more jobs in the American economy, and additional online 401(k) plan providers have popped up specializing in easily-administered, cost-effective retirement plans geared toward employers with 500 or fewer employees.
However, not all plan providers are the same–and not all 401(k) plan pricing structures are created equal.
Some plan administrators charge AUM fees, which can eat at your savings. While a 0.1% annual fee may not sound like much, it can lower your account balance by thousands of dollars by the time you retire.
Ubiquity is here to help you get the right-sized 401(k) plan for your business, understand different retirement plan structures, and uncover sneaky hidden fees that are all too common in the industry. Whether you’re a solo entrepreneur or small business owner with 100 or fewer employees, you deserve a fair-priced 401(k) plan that helps you attract and retain top talent, with complete transparency on exactly what you’re paying.
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Types of Fees Charged by 401(k) Plan Providers
A 401(k) plan administrator may charge one or more of the following fees:
Assets Under Management Fees
By far, the largest component of 401(k) plan fees is associated with managing employee funds. Most 401(k) plan providers charge Assets Under Management (AUM) based on a percentage of the plan’s total assets and are typically deducted from your investment returns, so they are easily hidden. AUM fees can be charged for investment advice, portfolio management, custodian incentives, or investment trading fees.
If you have a 1.5% AUM fee, for instance, this means you are paying $1.50 on every $100 in your 401(k) account. The better your portfolio does, the more you pay in fees. If you have $500,000 invested, this seemingly “small” 1.5% fee totals $7,500 deducted from your fund. Some providers even charge a penalty if your plan fails to meet certain asset levels.
Flat Plan Administration Fees
The day-to-day operation of a 401(k) plan can be overwhelming for businesses to handle in-house with their own staff of accountants, financial advisers, tax professionals, bankers, lawyers, trustees, and human resources professionals. It is a full-time job to manage all the moving parts and ensure a smooth rollout. These services are basic and necessary.
That is why employers hire plan providers – to take the burden off their hands.
Flat fees are a transparent alternative to AUM fees. Instead of paying a percentage of the total amount invested, a 401(k) administrator may charge a fixed monthly, quarterly, or annual fee at one flat rate. These fees can vary widely, depending on the provider, but generally cover setup, enrollment, recordkeeping, employee communications, employer support, legal expenses, loan administration, and trustee services. A plan provider may offer a host of additional services, such as telephone voice-response systems, customer service representative support, educational seminars, investment advice, electronic access to plan information, financial wellness portals, daily valuation reports, and retirement planning software.
Some 401(k) providers who charge a flat fee run their plans in tandem with a per-person price tag based on how many employees are participating in the program. This fee is assessed for recordkeeping purposes, under the assumption that it costs more to manage a portfolio of 1,000 versus that of 100. A standard industry trick is to lure employers in with a surprisingly low flat fee but sneak in a higher per-participant cost.
A 401(k) provider may charge when participants perform certain actions like changing a fund lineup, withdrawing a loan, taking a distribution, or using premium investment advisory services. Frequent or high-cost transaction fees can slowly eat away at your savings. Transaction fees can happen with both asset-based and flat-fee structures.
How to Compare 401(k) Costs
Given the vast discrepancies in 401(k) plan structures, it can be challenging to compare apples to apples. Fortunately, since 2012, the Department of Labor has mandated that all plan providers give fair notice of all fees and services rendered.
- If you currently have a 401(k) plan: Ask your provider for a 408 (b)(2) disclosure to see a list of vendors who service your account, which services you’re paying for, and what fees you’re being charged. You can also ask your adviser to benchmark your plan against other similar models to determine the reasonableness of your contract.
- If this is your first plan: Look at the fund lineup expense ratios, setup fees, and administration costs to see the breakdown before signing on the dotted line. For many options, the 401(k) expense ratios are exorbitantly high. The percentage-based charges go well above what it actually costs to make investment transactions or operational expenses. These costs may be used to market the firm or incentivize managers to invest more actively to make the firm higher profits.
- No matter what: Consider tomorrow, as well as today. Why waste money if you don’t have to? Compare and model out beyond the current year to gauge the impact of costs over an extended period of time. Assess the compounding effect of fees on your employees’ retirement savings. Make sure you do not have any mutual fund share classes with the infamous 12b-1 fees, which can drive up costs 0.25 to 0.75 percent, without outperforming high-quality passive index funds. Review proposals from multiple plan administrators to see the difference a change in provider can make.
Ubiquity Offers a Different Approach to 401(k) Plan Pricing
All these fees can be overwhelming to a small business provider. Since 1999, Ubiquity has exclusively served solo entrepreneurs and small businesses with the most cost-effective 401(k) plans. We offer our clients four different 401(k) plan options available for one FLAT monthly fee, ranging from $18 for a Solo(k) to $165 for a Custom(k). We do not charge AUM, per-person, or transaction fees for our administrative work, though this is something to keep in mind when selecting your broker who actively manages your investments.
Whether you’re looking for a change in provider or setting up your first plan, Ubiquity is happy to help with transparent plan pricing for only the most essential administrative services you need. Schedule time to meet with a retirement expert today.