One Reason 401(k) Costs are Out of Control

So, M/M CFO or CEO, you run a tight ship on costs, right? You negotiate good contracts with employees and vendors. You’re tough on costs.

So, why does your 401(k) have a cost structure, in place for years, in which your plan costs automatically increase each year, compounding by as much as 10-15% per year?

Most 401(k) plans from a single provider (usually but not solely from banks and insurance companies), known as “bundled” plans charge their fees as a percentage of plan assets. Plan assets grow with each dollar contributed from employees, each matching contribution, with profit-sharing contributions, and with investment growth. As plan assets grow, so do fees, yet without any increase in service.

In 2014, a good investment year, many plans grew 15% from the year before. So did their fees. Ouch! Unfortunately, few managers noticed the increase.

Even many “open architecture” plans allow their investment manager, custodian, recordeeper and administrator to tie their fees to plan assets.

What a gravy train for plan providers! What a terrible deal for employers and plan participants!

How does this happen? Because, usually fees are billed to participant accounts and do not show up as a bill for the company to pay. If it did, there would be an outcry at the rapidly increasing costs each year. And, few executives think to compare the required 408(b((2) disclosure form they get from plan providers against last year’s form.

What’s more, it is a breach of fiduciary responsibility for those who oversee the plan to pay fees that are not “reasonable for services performed.” Tell me, when fees increase 5-15% per year compounded for the same continuing level of service, how can costs be reasonable for services performed beyond the first year?

As fast as I can, I am replacing 401(k) asset-based fees with flat fees. The savings over a few years are astounding. In a $10-$20 million plan that can be over $100,000 in savings in five years.

All I need is CEOs and CFOs to let me show them what that can mean for their plans. And, since fees are often taken out of particpant account balances, show what that can mean for plan participants, including themselves, who often have the largest account balances and pay the highest fees unknowingly.

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