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Enrolling in a 401(k) is a great way to save for retirement. What many don’t realize, however, is that doing so often comes at a cost—and it’s not just employers left holding the bag.

Last year, an industry survey found that over a third of 401(k) participants believed they didn’t have to pay for their accounts. Of those who knew about the fees, only 27 percent actually had a rough idea of what they amounted to.

From the investment managers moving your money around, to the back offices handling compliance and recordkeeping, everyone wants a cut. The Department of Labor divides 401(k) fees into three categories:

  • Investment Fees: Behind the scenes, investment managers are managing your 401(k) funds to help maximize potential gains. While investment fees are typically charged as a percentage of assets, these may vary based on whether the funds are actively or passively managed. Fees will almost always be charged by the mutual funds you are invested in, but you may also have a financial advisor fee charged on top of that by the advisor to the plan. In most cases, investment fees account for the largest share of 401(k) fees overall.
  • Administration Fees: 401(k) plan administrators have a lot on their plates. These third-party providers are responsible for various tasks such as day-to-day administration, recordkeeping, reporting, and compliance testing. For all of this, administrators will charge a fee—often a flat rate per participant or a percentage of assets under management. While employers will sometimes cover these costs on employees’ behalf, they are not required to.
  • Individual Service Fees: Providers will often charge participants for special one-off services, like distributing funds, processing a 401(k) loan, or processing a Qualified Domestic Relations Order.

On top of these costs, plan participants may also be subject to 12b-1 fees charged by mutual funds, which are often embedded in the investment fees. These fees are meant to pay for the marketing of mutual funds and to compensate the salespeople who bring new investors in.

Wait, salespeople? As implied by the name, potentially thousands of investors pool their money into a mutual fund, which is then invested accordingly by a fund manager. It’s believed that more money invested into a mutual fund would lower operational expenses per investor due to economies of scale. Sales and marketing teams are tasked with bringing more investors into the mutual fund and are compensated via the 12b-1 fees paid for by the plan.

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Expense Ratios

A good way to know if you’re overpaying for your 401(k) is to look at your plan investments’ total expense ratio. “Expense ratio” refers to the expenses that will be deducted from investments relative to the total assets. The total expense ratio may include different types of fees, including fund management and administrative fees. To calculate your total expense ratio, simply multiply the weighted expense ratio of each investment plus other fees paid from your account, by total account balance.

In other words, if your account has $30,000, a 1 percent expense ratio means that you are paying $300 in fees out of your assets.

So what’s considered a typical total expense ratio? That depends on a number of factors, with company size being one of them. Historically, small businesses tended to be subject to higher total expense ratios because their accounts were more costly for providers to administer. According to the 401(k) Book of Averages, a company with 2,000 employees can expect to see an average 0.78% total expense ratio. In comparison, small businesses plans with 50 employees have an average expense ratio of 1.26%. At 25 employees, it’s 1.35%*.

Expense ratios may read like tiny percentages, but they can have a big impact on your retirement savings over time since they will compound as the account’s holdings grow. That’s why understanding the expense ratio of your investment elections is so important, and why so many Americans are likely missing out when they report not understanding their fees.

We’ve all heard the saying, “No good deed goes unpunished.” Saving for retirement already requires employees to put money aside—the last thing they want to hear is that they’re being penalized for doing so. Unfortunately, small businesses haven’t always had access to plans with the low expense ratios enjoyed by enterprise companies.

At Guideline, we take a different approach. The average expense ratio of the mutual funds in our managed portfolios is under 0.07%.** And we don’t charge added asset-based fees for investment management services. Instead, we charge a low monthly fee, starting at $49 plus $8 per participant, so you can keep more of your investment growth.

At Guideline, we charge participating employees a 0.08% account fee. And our managed portfolios have a blended average mutual fund expense ratio under 0.07%.** When combined, the total AUM fees for our managed portfolios are about 10x less than the industry average, helping participants keep more of their retirement savings.

Investing in your employees’ retirement is the right thing to do. We believe it should be easy and affordable to do just that.

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The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.  You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.

*The average investment expense of plan assets for 401(k) plans with 2,000 participants and $50,000 in assets is 0.78% of assets, with 50 participants and $50,000 in assets is 1.26%, with 25 participants and $50,000 in assets is 1.35% of assets, according to the 20th Edition of the 401k Averages Book, with data updated through September 30, 2019. This average investment expense is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges.

**Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.07% of assets under management. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup here.