Work at a small employer? You likely pay high 401(k) fees

Work at a small employer? You likely pay high 401(k) fees


Yongyuan | E+ | Getty Images

Workers who save in a 401(k) plan offered by a small business pay fees that are twice as high as those paid by employees who work at the largest companies in the U.S.

The smallest workplace retirement plans (those with less than $25 million in aggregate savings) charge total fees of 0.88% a year, while the largest (those with more than $500 million) charge 0.41% annually, according to a Morningstar Center for Retirement and Policy Studies report.

Workers pay these 401(k) fees annually to financial firms like investment managers and plan administrators. The fees are automatically withdrawn from workers’ accounts as a percentage of their total savings.

“The U.S. [retirement] system does not work nearly as well for people who are not fortunate enough to work for larger, established employers,” said the study’s authors, Aron Szapiro, head of retirement studies and public policy, and Lia Mitchell, senior policy research analyst.

The study looks at median fees (those right in the middle of a group) in 2019, the most recent year of complete federal data. Many plans within size groups carry fees both lower and higher than the median.

More than 30% of the smallest plans have total costs exceeding 1% a year, according to Morningstar.

The difference between small and large plans can amount to a lot of money over decades of saving for retirement.

More from Personal Finance:
Other retirees could take Tom Brady’s cue and return to the workforce
Why the Federal Reserve raises interest rates to combat inflation
Cars leased in 2019 are now worth $7,200 more than expected

“Workers at employers with smaller plans who are saving just as much as those at employers with larger plans could have around 10% less in assets at retirement because of higher fees,” Szapiro said.

Employers with so-called “mega” plans can negotiate much lower fees from investment managers and other service providers than businesses with small 401(k) plans. They’ve also been more likely to adopt investments other than mutual funds that tend to be lower-cost.

There are just 2,115 employers offering so-called “mega” plans (those with more than $500 million). But their plans account for a big portion (43%) of all 401(k) investors, according to Morningstar.

Meanwhile, there are 649,000 small plans (with less than $25 million), but they account for 27% of all 401(k) savers, Morningstar found.

(The remaining savers fall somewhere in the middle of small and mega plans.)

While many workers have access to a low-cost 401(k) plan at work, the data speaks to a fragmented system that relies heavily on the largest businesses to succeed.

“The jobs of the future may not be with employers who offer these savings opportunities,” according to Szapiro and Mitchell. “Moreover, this concentration underscores that policymakers must maintain incentives that these large employers find attractive.”



Source

JPMorgan hired NOAA’s chief scientist to advise clients on navigating climate change
Finance

JPMorgan hired NOAA’s chief scientist to advise clients on navigating climate change

Key Points Sarah Kapnick started her career in 2004 as an investment banking analyst, but was struck by how little climate change was being factored into financial decision making. She later became the chief science officer at the National Oceanic and Atmospheric Administration (NOAA) Last year, JPMorgan hired Kapnick back into banking, where she’s advising […]

Read More
Daniel Loeb’s next task as his hedge fund turns 30: Avoiding becoming ‘AI roadkill’
Finance

Daniel Loeb’s next task as his hedge fund turns 30: Avoiding becoming ‘AI roadkill’

Daniel Loeb has found himself a new goal as his hedge fund Third Point entered its milestone 30th year: To be a true winner in the red-hot artificial intelligence boom and not run over by it. “Change is happening at an ever accelerating and increasing rate and it’s just going to require us to continue […]

Read More
Stocks making the biggest moves midday: Costco, Palantir, Gap, Ulta Beauty and more
Finance

Stocks making the biggest moves midday: Costco, Palantir, Gap, Ulta Beauty and more

Check out the companies making headlines in midday trading: Costco — The wholesaler gained more than 3% on fiscal third-quarter results that surpassed analysts’ estimates, while sales jumped 8% from the same period a year ago. Ulta Beauty — Shares of the beauty retailer skyrocketed nearly 13% to hit a 52-week high after the company […]

Read More