| By :
Brian Fricke
Copyright (c) 2010 Brian Fricke Most people think that as an employee participating in their company’s 401k plan, that there are no costs to them for their account. Some of the costs are paid by the employer, but some are also paid by the employee, they just don’t ‘see the costs’ deducted from their account! 401K retirement plans are sold by different types of vendors. Sometimes it’s an insurance company, sometimes a discount brokerage firm (i.e. Fidelity, Schwab, Vanguard etc). Typically, the larger the business, the lower each participant’s costs will be – so if you work for a company that has thousands of employees, on a per-person basis your costs are going to be lower than, say, somebody working for a company that has 5 employees. A lot of times small business owners get involved with offering employee benefits without realizing the costs that are involved. The insurance companies are notorious for being more expensive in these cases. And, wouldn’t you know it, they have been the predominant 401k providers in the small business community, simply because a lot of the larger discount brokerage firms felt providing 401ks to small businesses wasn’t cost effective. The good news is, this is changing. The bad news is that a lot of small businesses have 401k products they bought years ago that may not be the most cost effective solution today. So whether you’re an employee or an employer, you should take the time to look at what’s going on in your plans just to make sure that you are getting the most bang for your buck. What typically happens with insurance companies is that they wrap their retirement plans in with an annuity product. From an investment perspective, annuities are expensive because they include an insurance element and insurance costs money. Typically those costs can run somewhere between 2 and 3% of plan assets. So if your 401k balance is $100,000, you’re paying around $3,000 per year! For an account most people think is free. Years ago, plan charges were basically covered by the company that offered the plan. The company would pay the fee, and the participants paid a portion of that fee through the expenses passed on through their investments. But if you take a closer look at the mutual funds within your plan, sometimes, depending on the plan you are involved with, you can be surprised by what you find. Employers are being sold 401K plans and being told that there are no admin or contract charges, but those fees are being pushed out to the investments themselves. So what should you do? If you’re an employee of a small business, ask the owner what your total 401k fees are and how they compare to other options/choices that are available. It may trigger something in your employer, and they may decide it’s time to take a closer look.
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