The Frugal Fiduciary Blog

401k Fees: Are Traditional 401k Services Worth a Smaller Retirement Nest Egg?

Posted by Eric Droblyen on Nov 16, 2016

Picture of a small egg in bird's nest, representing a smaller retirement savings because of fees

I have a confession – my company’s participant benefit statements are nothing special.  While they disclose all the requisite information, they are matter-of-fact and lack color graphics.  They’re also delivered electronically, not mailed.

Our statements are in sharp contrast to the paper statements my college professor wife receives each quarter by mail from TIAA, her school’s 403b provider.  Her statements are printed in glossy color on heavy paper stock.  They also include pleasing pictures of happy retirees and the same helpful savings tips we provide on our participant website.

That said, you might be surprised to learn that I consider our statements superior.  Why?  They are just as effective at their job - communicating 401k balance, return and fee information to 401k participants – but they cost a lot less to deliver, which helps us keep our 401k fees low.  I think lower 401k fees benefit 401k participants more than fancy mailed benefit statements.

A sharpened focus on 401k fees is changing the way 401k services are delivered.  Historically, onsite client visits, mailed benefit statements, and formal enrollment meetings were the norm.  Today, 401k providers are replacing these traditional (pre-digital) 401k services with lower cost alternatives.  401k fiduciaries should understand this trend when shopping for 401k services.  Traditional 401k services can result in valueless 401k provider fees that unnecessarily harm participant account returns.

Cost vs. Benefit

A growing number of 401k providers are delivering simple 401k services online to reduce costs and lower fees.  This trend is good news for 401k participants who value account returns more than high-touch traditional 401k services.

However, paying more for traditional 401k services is not always bad.  For example, when a workforce needs professional help to make appropriate 401k enrollment decisions.  When this is the case, hiring a financial advisor can be money well spent.  After all, some participants may not save at all without professional human assistance.

My advice to 401k fiduciaries – buy the lowest-priced competent 401k services your participants need.  Maximizing the retirement nest eggs of your employees should always be your #1 priority.

Even small fees add up

My favorite retirement savings meme is that by skipping a $4 latte each day, and instead contributing that money to a 401k plan, you can add hundreds of thousands of dollars to your retirement nest egg over the course of decades due to the power of compound interest.  

While this meme is often based on overly generous interest assumptions, its gist is important – even small annual fee savings can add up over time.  Assuming a modest 6% interest rate, a $200 annual fee savings over 40 years can add $35,594.18 to a retirement nest egg.  For many people, that amount can pay for an extra year of retirement!

Are traditional 401k services worth it?

Maximizing 401k participant nest eggs should be the #1 priority for small business 401k fiduciaries.  Today’s low cost 401k providers are making this job easier by using simple, technology-driven services to drive down 401k fees. 

There is nothing wrong with 401k fiduciaries paying higher provider fees when 401k participants receive commensurate value in return for their services.  However, fancy mailed benefit statements and other traditional 401k services often fail this test.  When this true, these services should be avoided in favor of less costly alternatives.

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Topics: low cost 401(k) plan, 401k fees, small business 401k

Written by: Eric Droblyen

Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.

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“We want you and your employees to have a successful plan.” Greg Carpenter, CEO of Employee Fiduciary, explains how low fees help keep your money in the market, working for you.

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