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Who is Getting the Most Return from Your 401(k)?

Your 401(k) has probably had stellar returns since the market bottom on March 9, 2009 -- roughly 50%, depending on fund selection. Or has it? You may be seeing a lot of your returns eaten up with hidden fees and costs within your plan -- easily 3% or more annually.  Those are just silently siphoned off your participants' account values.  

While 401(k) participation dropped like a rock during the stock market debacle, employees are re-learning that these are, in fact, good vehicles for long-term saving and investing. And those people who kept pounding money into their 401(k)s during the spring of 2009 are seeing stellar returns on those deposits (remember dollar-cost averaging?). 

It's your responsibility as a business owner or CEO is to make sure that both you and your employees are getting the best returns you can from your 401(k). What you may find, if you haven't shopped your plan lately, is that hidden fees and costs are eating up 3% OR MORE of your plan's annual returns

Why is that? In years past, plan fiduciaries (the company providing your plan) were focused on big game -- Fortune 1000 companies with lots of plan assets. They weren't very competitive on small plans, because there were plenty of big ones to go after. Now the tables have turned. With those plan populations shrinking and small business jobs growing, some have figured it out and are seriously pursuing smaller plans -- those with few employees and smaller plan assets. But not all. And if you're on the hook for a high-cost plan, they'll keep you there until you figure it out.

I recently helped one of my business coaching clients with a 401(k) plan Request for Proposal. They had realized that their existing plan had not only lousy returns, but also high internal (hidden) fees, the most egregious of which was a back-end load that gave anyone withdrawing funds a haircut of as much as 8% that went into the fiduciary's (and the broker's) pocket. Believe it or not, the RFP responses included even more such plans -- fees in excess of 3% annually, plus front- or back-end loads!   Here are the "bad actors" from that RFP:  

  • Ohio National -- Average fund expense ratios >3%, plus an 8% back-end load (this should be illegal)
  • John Hancock -- Average fund expense ratios >2.6% plus a back-end load
  • Principal -- Average fund expense ratios >2.3% 
  • Emprise Bank -- High bidder on maintenance fees -- $1,800 app fee plus $3950/year for 20 participants

More on this topic from

Here are some things to watch for (and look for in your existing plan): 

  • Brand -- If the Brand (fiduciary) on your plan is an Insurance company, you're probably paying higher fees than you need to be. 
  • "Annuity" or "Group Annuity"-- If anywhere in the plan name or description you find the word "Annuity", you're probably paying extraordinarily high fees, plus hidden front or back-end loads. These natively high-cost plans were about the only options available several years ago for smaller businesses.
  • Source -- If you ask a bank for a 401(k) proposal, chances are it will be an annuity-style product from an insurance company. Why? Banks are dying for fee income, and they get a fee split from the extremely lucrative group annuity plans out there. 

What SHOULD you be looking for? 

  • Brand -- Look for big-name Mutual Fund providers -- their scale and underlying business models drive down costs. If your existing plan assets are substantial, you may be of interest to Fidelity, Vanguard, T Rowe Price or others in that business. One moderately low-cost provider who's actually interested in smaller plans is American Funds -- do have a look at them. 
  • Fees -- Comb the prospectus for disclosures of fees -- they're legally required to provide them.  Look for:
    • Loads -- Front end or back end loads usually have a time-based expiration.  Avoid any plan that has any loads whatsoever.  
    • Plan Fees -- Administrative, custodial, etc.  
    • Fund Fees (internal) -- Look at overall expense ratio, management fees and 12b-1 fees within the offered funds themselves
    • Share Classes -- many plans, American Funds included, offer different "classes" of shares within the same fund.   The Growth Fund of America, for example offers F-1 shares with minimal fees (<0.5%).  Four other share classes, all with higher fees, are available from the same fund. 

Give your existing plan a hard read. Look for hidden costs, both in the plan itself and the underlying funds -- there are fees lurking both places. And let us know what you find. 


Terry Weaver
Chief Executive Boards International
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