Pricing for 401K plans was once optimized for the budgets of big businesses. As time has passed, smaller entities entered the scene and were responsible for an increasing number of American jobs. With this change, 401K plan providers renovated their pricing models to keep up with the budgeting difference between these small and large companies. Retirement plans were then optimized for easy administration and cost-effectiveness, specifically geared toward companies that were “small businesses” by its purest definition: 500 employees or less. Still, there are many caveats to be aware of when choosing your company’s 401K plan provider. Review some of these caveats below to select the best provider for your business.
What Types of Fees Do 401K Plan Providers Charge?
Fees are perhaps one of the most critical factors you must be aware of when choosing a 401K plan provider. While you cannot avoid them entirely, you must try to minimize the fees imposed on your 401K plan as much as possible. Even a 0.1% annual fee can cost you thousands of dollars by the time you’re ready to retire. The primary types of fees that are typically charged by a 401K plan provider are as follows:
- Per-person: This will be based on how many employees are included in your 401K program. The per-person fee is primarily for recordkeeping and is centered on the assumption that it is cheaper to manage a portfolio of a few hundred employees versus 1,000, for example. Be wary of this fee, as a popular plan provider tactic is to draw small businesses into the program with a low flat fee, but surprising them with increased expenses per participant.
- Asset under management: These fees may be charged for investment advice, custodian incentives, portfolio management, and even fees related to investment trading. This fee is typically based on a specific percentage of the total assets included in your plan and deducted from investment returns.
- Flat plan administration: This is an alternative to the Asset Under Management (AUM) fee. Rather than paying a total investment amount, the 401K administrator will be expected to pay a fixed price on a monthly, quarterly, or annual fee. Usually, this includes enrollment, setup, employee communications, recordkeeping, legal expenses, loan administration, employer support, and trustee services, but costs will vary per employer.
Comparing Costs Between 401K Plans
It can be challenging to identify the differences between various 401K plans. However, this effort has been made to be much easier since plan providers are now required by the Department of Labor to provide clear notice of the fees and services included in a plan. Adhere to the following guidelines to make sure you get the best plan for your business:
- Ask for a list of vendors that will be servicing your account.
- Verify which services you will be paying for and the associated fees.
- Review the administration costs, setup fees, and expense ratios before signing.
With prior knowledge and careful review of your potential 401K plan provider, you can ensure that both you and your employees will have the best 401K to get you the best savings for retirement.