Total Cost of Ownership
ShareBuilder 401k is designed to lower your total cost of ownership for 401(k) benefits. There are few products or services in which total cost of ownership matters as much as those in investing. The more spent in investment expenses, the less remains invested in the markets to build for retirement.
Drivers of Investment Expenses and What You Need to Know
Weighing whether to switch providers and determining who has the cost advantage can require careful analysis. Even with the DOL’s 408 2(b) rules for 401(k) Plan Fee Disclosure, it can still be challenging to understand what expenses are charged in your plan—and what’s charged can vary by fund. Here are some things to consider when assessing a 401(k) plan:
Fund Expense Ratios
Fund expenses will include the fund provider’s expenses to manage and service the fund and can include costs for sales and distribution, revenue sharing, sub- transfer fees, and more. If the average fund expense ratio in your investment lineup is over 1%, that’s a red flag.
Recordkeeping, Administration & Custodial Services
These costs may be bundled into investment expenses and may or may not be a flat price per participant. It is deducted from your employees’ holdings each quarter—although some employers will pay for some or all of these services directly. This is more common in plans with <$5M in assets where this cost can be material to employees.
Investment Management & Plan Consultation
If your provider is serving as an ERISA 3(38) advisor fiduciary it protects your firm because your provider is regularly reviewing and maintaining your plan’s investment roster— work that would otherwise fall on your company. Your provider may also offer participant education programs and/or general plan design consultations. Ideally, your provider will provide and perform investment management, education, and plan design consultation at a high level in line with your needs.
Fund expenses will include the fund provider’s expenses to manage and service the fund and can include costs for sales and distribution, revenue sharing, sub- transfer fees, and more. If the average fund expense ratio in your investment lineup is over 1%, that’s a red flag.
These costs may be bundled into investment expenses and may or may not be a flat price per participant. It is deducted from your employees’ holdings each quarter—although some employers will pay for some or all of these services directly. This is more common in plans with <$5M in assets where this cost can be material to employees.
If your provider is serving as an ERISA 3(38) advisor fiduciary it protects your firm because your provider is regularly reviewing and maintaining your plan’s investment roster— work that would otherwise fall on your company. Your provider may also offer participant education programs and/or general plan design consultations. Ideally, your provider will provide and perform investment management, education, and plan design consultation at a high level in line with your needs.
How to Uncover, Quantify and Compare 401(k) Costs
Review your provider’s 408 2(b) fee disclosure. You may receive multiple fee disclosures if you are using multiple providers. To understand your full costs, you will likely need to add them altogether. It may also be confusing, so look out.
Use a 401(k) cost benchmarking service to help provide perspective on average pricing for plans your size.
Compare and model out beyond the current year to see the impact of costs over a longer period.
Assess the compounding effect of high costs on your employees’ retirement savings. Consider this $20M+ plan and how it grows over time with different investment expenses:
5 Year comparison
As you can see, just 0.5% to 1% more in costs can have big impact on the amount in a 401(k) plan over time.
This hypothetical example compares a plan with $20M in assets and 500 participants in which one company is paying 1.25% in expenses and the other is paying ShareBuilder 401k pricing of 0.48% that declines to 0.28% over 5 years as the plan grows and surpasses our automatic pricing milestones. The example assumes annual net contributions of $3M and the plan overall achieves 7% in annual returns. Tax considerations are not considered and this example does not imply a guarantee of future returns.
Keep all-in investment expenses under 1%.
Limit your investment options to low-expense funds.
How does your 401(k) provider(s) earn money on your plan?
How does your 401(k) provider keep costs in check?
This includes the fund expense ratios as well as the three big drivers. Whether your plan is $1 million or $5 billion in assets, it is more than doable to keep costs under 1%. We believe this is essential for long-term success.
What percentage of your investment roster is made up of index funds vs. actively managed funds? Index funds typically have lower expenses than actively managed funds. If the majority of funds in your investment roster are actively managed investments, think about how the expenses stack up and whether the fund performance of these over 5 and 10-years align with their benchmarks and comparable index funds.
We believe the most straightforward and fair approach is to apply a flat investment management expense across the plan to manage ERISA 3(38) services, plan consultation, employee education, recordkeeping and custodial services. Warning: don’t be surprised to find that marketing expenses (12b-1s and revenue sharing), share class, and wraps vary by fund with your current provider. Why? How is that fair? These other fees and expenses can unknowingly penalize an employee for picking one fund over another. Also, are you getting the services you want, desire or need to run a great plan at a reasonable price? Does the service really vary by fund?
We automatically lower expenses as your plan grows past identified milestones to ensure pricing remains low for employees. Note: expenses can increase if assets drop and/or participation grows substantially.
Other Costs: Setup and Conversion Charges
Some plans may assess one-time setup and/or plan conversion costs, although there are providers who don’t charge for plan conversions and waive plan setup if the total assets exceed a certain amount.
We Can Help You Compare Plans
If you want some guidance in determining whether your plan makes the most financial sense for you and your employees, we can help by reviewing your costs and even forecasting the impact.