Small Business 401(K) Plans Pay Hidden Fees

Roughly 3 out of every 4 small business 401(k) plans are being charged hidden fees by their provider, according to a study by Employee Fiduciary, LLC. These hidden fees cost the plan participants of this study an average of $228, every year. When factoring in compound interest, this can result in hundreds of thousands of dollars in lost returns over several decades of retirement saving.

“These hidden 401(k) fees are predatory and unacceptable,” says Eric Droblyen, President & CEO of Employee Fiduciary. “We are on the verge of a retirement crisis. More than half of working-age households are at risk of having inadequate retirement savings, and these hidden fees are a big reason why.”

In February 2012, the Department of Labor began requiring 401(k) providers to disclose their fees in documents called 408(b)(2) fee disclosures. While intended to provide transparency to plan fiduciaries and their participants, these disclosures often take the form of confusing, multi-page documents that are difficult for someone without years of 401(k) expertise to decipher. In response, in 2014 Employee Fiduciary began offering a free Fee Comparison Service in which they analyze fee disclosures and provide plan fiduciaries with an easy-to-read report to understand the fees they’re being charged.

“Hidden 401(k) fees are incredibly profitable for these providers, so it’s in their best interest for their fee disclosures to be confusing. That’s why we started our Fee Comparison Service. We want to help small business owners and their employees avoid being saddled with ridiculous fees that hurt their chances of retiring on time,” says Eric Droblyen.

This latest study aggregates data from over 100 fee disclosures collected from 31 different providers since December 2018. The study shows a breakdown of each provider’s average all-in fee (expressed as a % of plan assets), how much the provider’s admin fees cost each participant on average, and what percentage of these admin fees are charged as hidden fees via revenue sharing or variable annuity arrangements. This data can be immensely useful for plan fiduciaries who are looking to benchmark their fees or evaluate providers.

During the study, Employee Fiduciary made the following observations:

• The 1.18% all-in fee average was quite a bit lower than the 1.40% average found in their 2018 study, while the $445.43 per-capita admin fee average was about the same ($422.30 in 2018).
• 75.96% of plans paid “hidden” administration fees.
• 6 of the top 10 highest-priced 401(k) providers in terms of per capita administration fees also ranked in the top 10 based on their % of hidden fees.
• 9 of the top 10 highest-priced 401(k) providers in terms of per capita administration fees were insurance companies.
• 401(k) administration fees should be evaluated on a per-capita basis to best ensure their reasonableness.

“Our goal is to help plan sponsors avoid the predatory fee practices used by many 401(k) providers. While hidden 401(k) fees help these providers pay their CEOs millions of dollars every year in bonuses, they may force small business owners and their employees to delay retirement by several years just to reach their savings goal,” says Eric Droblyen. “If you ask us, that just isn’t fair.”