Learn About 401(k) Participant Fees and Expenses
Fees have a clear impact on investment returns
John and Alan are two 401(k) participants. Each has $50,000 invested in the same type of fund delivering the same 8% return per year. Let's assume that they hold on to these funds for twenty years until reaching retirement age. The only difference is that John's annual participant fees and expenses total 1%, while Alan pays a total of 2%.
The graph at right shows that after 20 years, John has $35,026 more in retirement than Alan. After 30 years John would have $97,716 more than Alan. Clearly, participant fees impact how much you can potentially earn over time.
This hypothetical presentation is based on a fixed annual 8% return with no distributions or tax considerations, and does not imply future returns.
Goal: pay no more than 1% in participant fees
We believe in keeping your total fees less than 1%. Some 401(k) providers may claim that they charge no asset management fees or boast of low expense-ratio investments, or even that they will refund a portion of 12b-1 fees. Just be sure you know the sum total of all participant fees and other upfront loads or excessive charges that can make these claims irrelevant.
The list of potential extra charges can be overwhelming: 12b-1 fees, sales loads and wrap fees, transaction fees, rebalancing fees, sub-transfer agent (sub-TA) fees, soft dollars, and fund turnover expenses, just to name a few. Don't let the names confuse you — the total cost applied against your contributions is all that matters!
An asset management fee should ideally be less than 0.8% and cover all your individual transactions, the rebalancing of your investments, customer-care calls, and every other usual service needed to manage your contributions and investments. Fund expense ratios should average less than 0.3% across a diversified portfolio.
For small businesses, ShareBuilder 401k blows away typical providers
ShareBuilder 401k assesses a 0.75% annual asset management fee and offers funds with an average model portfolio expense ratio of 0.17% for a total of 0.92%.
*Price estimates are based on quote requests, interviews and printed data from leading small business 401(k) providers in Q2, 2011 and other 2010 industry data, and is compared to ShareBuilder's Simplified 401k plan, with $50,000 in total assets.
TIP: Ask your provider (or potential provider) these Six Essential Questions to ensure that you are getting the best plan for your business at the best price. Use our 401(k) Cost Comparison worksheet to get all the facts you need.
Questions or concerns? We look forward to hearing from you at 800-943-6108, option 1.