What do Cristiano Ronaldo and your small-business 401(k) plan have in common?
After leading Real Madrid to its 2nd consecutive European Cup Championship on June 3, Cristiano Ronaldo, arguably one of the best soccer players in the world, exclaimed, “this is one of the best moments of my career, but it seems I am able to say that every year.” “People won’t be able to criticize me because “numbers don’t lie,” referring to the fact that he has scored more goals than any other player in the history of the European Championship finals.
Back to your 401(k) plan sponsored by your small business (< 50 employees) employer, although small businesses create 7 of every 10 new jobs and employ close to 1/2 of all U.S. workers (www.SBA.gov), when it comes to the 401(k) plan small businesses rely on to attract, reward and secure the future of its employees, most are getting a lousy deal. Many, in fact, are paying fees that are 5 to 6 times greater than workers at larger companies (Stevenson, Bloomberg, 5/13/15), and like Cristiano Ronaldo says, “numbers don’t lie.”
One reason smaller companies pay more, which makes perfect sense, is that the cost of setting up and administering the plan is spread across fewer workers. A second reason, and in my opinion the one most responsible for the disparity in fees, is that shopping around for a 401(k) plan is simply confusing, as there is no standard way that plan providers are required to describe their fees.
The result is that small businesses pay a wide range of fees for 401(k) plans. The average small plan fee is 1.5-2.0%, while some plans, according to Brightscope, pay as little as 0.5% to as much as 3-4%. *If you don’t think higher fees will make a big difference to your retirement, check the math. If you invest $10,000 in a 401(k) that returns 6% a year, in a plan with a 1% fee. Two decades later, you’ll have $26,000 in the plan. In a plan that charges a 3% fee, you’ll wind up with just $17,440.
But there is still hope. Though most employers don’t have the time or interest to review their 401(k) plan provider’s 40 to 50-page summary of fees and disclosures filing, there are independent Registered Investment Advisors, like The Prudent Planner, LLC, that will step in and help employers when it comes to (1) deciphering what their current plan is truly costing them, and (2) identifying alternative plan providers and options.
A review of your small business 401(k) plan will afford you the following benefits:
- Identifying market competitiveness of current plan
- Providing leverage to renegotiate with current plan provider
- Identifying more advantageous options, keeping more profit in the business