How to lower costs in any Retirement Plan?
Following is my general guideline on lowering costs in any qualified plan:
1) Maximize the use of ETFs within 401(K) plans. ETFs are about 70-80% chepear than an average active mutual fund. For example, the Category Average of World Stock Mutual Funds Expense Ratio is 1.45%. One can build a well diversified Global Equity Model using only ETFs for 0.31%.
2) If you do use Mutual Funds within 401(K) plans make sure you are using the appropriate no-load share class, without 12b(1) fees, etc. Ask for the lowest cost Mutual Funds that are designed to be held within such plans.
3) Ask for full transparency of costs from your service providers, which includes your Advisor, Money Manager, Custodian and Third Party Administrator. Add it all up and if it is more than 1% annually, then you need to look further.
We recommend following a best-of-breed approach when looking for a solution. If you were to go with the cheapest solution, Vanguard would be an obvious answer, as you can get your Manager Fees down to below 0.2% per year, which is lower than 0.31% above for an all ETF equity portfolio. However, you give up on performance as there is no active management involved nither at the security level nor at the asset allocation level. Using passive investments like ETFs within an active asset allocation framework is a better approach as it not only reduces costs but can also enhance risk-adjusted returns.