Fee range wide for small 401(k) plans

The wide range of all 401(k) plan fees paid by small plan sponsors and participants, from a low of .43% to a high of 1.88%, might be indicative of the opportunity many such sponsors have to trim those expenses. “Small” as defined by the source of that data — the publishers of the latest 401(k) Averages Book, is up to 50 plan participants or $2.5 million in assets.

The average total fee number for small plans — 1.44% — is much closer to the high end of the spectrum than the low. To the extent that participants are paying the fees and those fees are eating into their net investment returns significantly, the difference between paying the average 1.44% total fee structure and a number much closer to the lower end, would result in substantial differences in retirement savings accumulations over time.

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There is also a wide gap (107 basis points) between the low (.31%) and high (1.38%) total cost for “large” plans — those with at least 1,000 participants and $50 million in assets. It is not as wide as the 145 basis point gap for small plans, however. That distinction is probably attributable to a greater focus on fees among larger plan sponsors.

Narrowing gap

“The range of costs has narrowed over the years,” said Joseph Valletta, CFA, co-author of the 401(k) Averages Book, now in its 15^th edition. “But sponsors still need to examine their fees and understand where they fit in the spectrum of costs,” he added.

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Curiously, average total fees paid by smaller plans is unchanged from the prior year, at the same time that asset management costs are falling (albeit not dramatically). “The news continues to be that we are seeing a reduction in investment fund expenses for all plan sizes,” according to Valletta.

For example, small plans paid an average 1.38% management fee for large U.S. equity funds last year, down slightly from 1.40% the year before. Similarly, the drop was to 1.32% for target-date funds, from 1.35% the prior year.

If asset management fees are declining but overall fees are remaining unchanged, that suggests that recordkeeping charges are on the rise. That does not appear to be the case, however.

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What’s happening instead, according to Valetta’s partner David Huntley, is that with strong stock market returns in recent years, equity funds are growing into a larger proportional slice of participants’ total 401(k) portfolios — assuming they aren’t automatically rebalanced. Actively managed equity funds’ fees generally are higher than those for bond and stable asset funds.

“As 401(k) balances reach new highs, participants’ exposure to equities and target date funds has increased,” Huntley said.

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