Beware High 401(k) Fees What you need to know about the charges behind 401(k) plans to keep your employees happy.
By Gwen Moran Edited by Frances Dodds
Opinions expressed by BIZ Experiences contributors are their own.
How I Saved Bob Syracuse, co-owner, Pizza Plant Italian Pub, Williamsville, N.Y. "In 1994, we joined a barter organization [International Monetary System, formerly Rochester Trade Exchange] because it seemed interesting. It works. We've remodeled our restaurant facilities and purchased advertising, window cleaning and even food items through the group. Our purchases work like a credit card--we buy something, it goes through the barter service, then they debit our account and credit the other individual's account. We still have to pay sales tax, which we would pay anyway. We also get a 1099-B for anything we've purchased, but from that we can deduct the expenses of what we have provided. We do about $20,000 worth of barter per year. We save an average of about $4,000 per year in the difference between the value we receive and the cost of the items we provide." |
Last year, Caterpillar settled a lawsuit brought by its employees, claiming that the construction and manufacturing giant failed to fulfill its fiduciary duty to ensure the fees on its 401(k) plan were not excessively high. The August settlement cost the Peoria, Ill., company $16.5 million.
Business owners offering 401(k) plans have a fiduciary duty to their employees, says Jonathan Bergman, vice president and chief investment officer of Palisades Hudson Financial Group, a financial planning firm in Scarsdale, N.Y. He says your plan should meet the following criteria, at minimum:
Total fees of less than 1.25 percent a year. A 2009 report by consulting giant Deloitte found that plans with less than $1 million in assets, like those of many small businesses, routinely were paying as much as 2 percent "all-in," or the total of all fees. Bergman says he has seen small businesses paying more than 3 percent to cover investment management, brokers' commissions and record keeping, an amount Bergman calls "outrageous." These high fees come out of the employees' investments, meaning they'll have less for retirement, he says.
Choice of low-cost, high-quality funds. Bergman says investors should be concerned when a plan only offers a few choices, or when all choices are from one financial institution. Plans that offer mutual funds from only one or two fund families don't give participants enough choices and may indicate that the plan's broker chose them based on commissions paid, he says. Investment choices should go beyond ordinary stock and bond funds to include options like natural resources and inflation-protected securities funds.
Careful monitoring of funds. The plan trustee must keep close tabs on the performance of all mutual funds in the plan. If any consistently underperform, those funds should be replaced. This is the same kind of monitoring any good investment advisor is already doing for its individual clients, Bergman says, adding that most good fund managers or providers will offer seminars and educational opportunities so that the company's plan administrator can learn more about the investments and better represent employees' interests. Be sure to take advantage of them..
