While industry studies have shown that 401(k) fees have declined in recent years—the Investment Company Institute recently issued a report saying they averaged 0.49% in 2016, down from 0.51% in 2015—America’s Best 401k says that data is only part of the story.
As America’s Best 401k researchers note, fee data in the retirement industry is often based on the data that plan sponsors include on the Form 5500 that they file annually with regulators. However, in its white paper, “Fees Run High for Small Business 401(k) Plans,” the company points out that 89.9% of 401(k) plans, those with 100 or less participants, file a “short” version of Form 5500, which contains very little data and excludes pertinent information such as the name of the plan provider, compensation paid to brokers and advisers, compensation paid to recordkeepers and third-party administrators, and the mutual funds in the plan along with their corresponding expenses.
“By omitting nearly 90% of all 401(k) plans from comprehensive analysis, one might draw false conclusions about broader industry trends, such as the lowering of fees or greater access to low-cost index funds,” America’s Best 401k says. Of course, due to their far larger stature compared with the smallest plans, the relatively small number of large- and mega-sized retirement plans represent a majority of all retirement plan participants/assets in the U.S.
To generate a more complete picture of the fees paid by all participants, America’s Best 401k reviewed the thousands of participant 404(a)(5) and plan sponsor 408(b)(2) fee disclosure forms that it has received from small businesses. The company focused on the asset-based fees withdrawn from participant accounts, finding that the average couple making $30,000 a year between them and contributing 5% each to their 401(k)s would pay $154,794 in 401(k) fees over their working careers. For a couple making $90,000 a year, that would be $277,000 in fees.
“It’s simple math that a reduction in fees, whenever possible, is important for the financial future of plan participants,” the company says.
Analyzing data from the top 11 providers to the small plan market, America’s Best 401k found that they charge an average of between 1.19% and 1.95% to participants.
“It’s worth pointing out that most of the plans had limited or no access to low-cost index funds,” the company says. “Certain plans, typically those with under $1 million in assets, are told they do not yet qualify for low-cost index funds until the asset size reaches a minimum level. Most plans in the analysis had exclusively or a substantial majority of actively managed funds. These are significantly more expensive than index funds and may also deliver a portion of their revenue to the providers or brokers in a practice known as revenue sharing.”
Citing data from BrightScope and the Investment Company Institute, the company notes that plans with assets exceeding $10 million pay an average of 0.27% in fees.
America’s Best 401k predicts that new providers will enter the market and offer low-cost index funds and actively managed funds without revenue sharing—“giving participants access to the same institutional share classes that much larger plans enjoy.” The company expects these fees to range between 0.55% and 0.75%.
The white paper can be downloaded here.