The One Chart that Explains 401(k) Fees
One of the original issues that inspired us to create retirement plan ratings was the issue of 401(k) fees. We had read congressional testimony that indicated that the defined contribution marketplace had a fee crisis. We knew that we had to cut through the rhetoric and engage in a thorough fee analysis to get to the bottom of the issue. What we found was a marketplace that in some places is competitive and in other places has severe issues.
The following chart in particular seems to summarize the retirement plan fee issue succinctly.
Large plans (over $100m in assets) almost uniformly have fees below 1%. The largest plans are usually below 0.50%. The large end of the 401(k) marketplace is incredibly competitive. The small plan marketplace is a different story. Average fees for small plans is between 1.5-2%, with plenty of plans paying more than 2% a year in fees. I think we can all agree on a few things:
- There are higher operational costs associated with offering smaller plans, so higher fees should be expected.
- Paying north of 2% a year in fees makes investing prohibitively expensive and eats a big hole in participant retirement balances, regardless of the services that are offered at that fee level.
- There are too many plans paying too much in fees at the small end of the marketplace.
The sheer number of plans paying north of 2% a year in fees was shocking to us. There is a very real retirement penalty associated with working at a small company. To make matters worse, this chart cuts off at $1M in plan assets, so there are likely many, many more plans above 2% that don’t disclose the level of information we need to evaluate them.
On an encouraging note it was clear from the data that truly low cost plans exist at all plan sizes. So even though smaller plans are more expensive to administer, there are plans at all asset levels that are able to operate under 1% and even under 0.50%. So, with the right advice and guidance, plan sponsors can offer a retirement plan that is competitive on price with the largest companies in America.
There have been major improvements in fees over the years, as evidenced in our combined BrightScope/ICI 401(k) study released in December. But, as an industry we can and must do much better for participants.