Workers Pocket More Cash with Lower 401(k) Fees
NEW YORK ( MainStreet) The average total plan cost for a small retirement plan declined from 1.46% to 1.44% over the past year while the average total plan cost for a large retirement plan remained flat at 1.03%, according to a new 401(k) Averages Book report.
"Earners should be very happy about decreasing 401(k) fees because it will mean more money in their account at the end of the day," said Joe Valletta, co-author of the 401(k) Averages Book . The study revealed that investment expenses went from 1.37% to 1.35% for small plans while increasing from 1.00% to 1.01% for large plans.
A small retirement plan is defined as having fifty participants with $2,500,000 in assets compared to a 1,000 participants and $50,000,000 assets in a large plan.
"In most of our fee benchmark scenarios we saw a decline in total plan costs and investment fees on a year over year basis," said David Huntley, co-author of the 401(k) Averages Book. "In cases where it stayed flat or ticked up, the increase in equity exposure in our allocation model was typically the reason."
Fees are declining for smaller 401(k) plans due to new Department of Labor (DOL) fee disclosure regulations.
"These rules have created an environment where plan sponsors and their advisors are more aware of the fees being charged," Valletta told MainStreet. "This has created a competitive environment among the providers of 401(k) plans and thus fees have declined."
The DOL's Employee Benefits Security Administration (EBSA) requires that plan and investment related fee disclosures be provided to new hires and current employees quarterly, online and with an explanation of investment terms.
"Unfortunately we can't just say all small plans should be paying the same amount because the plan's average account balance will have a big influence on average fees," Valletta said. "There is no one size fits all benchmark for all small or large plans. You have to understand the plan characteristics."
Even if there was a standard, 80% of employers reported that the new rules mandating full disclosure of retirement plan fees and expenses have had little or no impact on their plan participants, according to a survey by BMO Retirement Services. Only one percent of plan sponsors participating in the survey reported seeing positive or negative changes in participant behavior.
If a plan participant does notice and thinks their 401(k) fees are too high, Valletta advises inquiring about benchmarked plan fees.
"With so many small employers either sponsoring or starting 401(k) plans we released a new set of benchmarks for plans with 10 participants. One benchmark assumes plan assets of $500,000 while the other is $100,000," said Valletta.
The study finds the average total plan expense for a 10 participant plan with $500,000 in assets is 1.90%.