401k Must-Knows for Business Owners: How to Cut Up to 65% in Costs & Stay Compliant

Most of our business owner clients that offer 401k plans to their employees are shocked by two big things. The first is the amount of money they’re actually paying that is costing them their retirement money and their employees retirement money, but also the legal requirements, the annual work that must be done to stay in compliance and they never do it. They don’t know about it. So I’m going to talk to you about the costs of your 401k today and also the annual benchmarking that you’re required to do by law. Whether you’re an employee or an employer, this is really important for you.

It’s Not Just Fund Fees: Who Really Gets Paid from Your 401k

I’m going to start with the basics because when we work with people who are retiring and they come in, they think the only fees that they’re paying inside their 401k is the expense ratio on the mutual fund. And then when we talk to business owners that come in and they become clients, they have no idea what I’m about to show you.

The very basics are you have employees and an employer. They both put money into the 401k, but the 401k is just a tax classification. You all have your own individual accounts. This is what separates a 401k plan from a defined benefit plan where it’s all one big account.

So you have your own individual accounts and then each year throughout the year, sometimes monthly or quarterly, you have all these different people that are going into the 401k and taking out their slice of the pie. So it’s not just the mutual fund fee that you see in your prospectus or when you’re going through and selecting your investments, the record keepers, the people who actually keep track of everything that’s transpiring inside the 401k. That’s a company. They have employees. They have to make a profit. They have to report to the Department of Labor, to the IRS.

You have the custodians who actually hold all the money. You have administrative expenses. You have trustee services. You have advisors a lot of times. You have educational fees inside your 401k quite often and you have mutual funds. And this is not an exhaustive list, but these are some of the big fees that you’ll see once you dig, dive deeper into your 401k, all the different people who are taking money out of your retirement and also your employees retirement.

Why the Department of Labor Requires Benchmarking

And if you’re a business owner, you care about your employees. Your employees are what makes your business thrive. So you want to protect them. They obviously want to be protected themselves. This is why the government, the Department of Labor makes it a fiduciary requirement that you benchmark your plan costs, not just the investment fees, but all of these administrative fees every single year to make sure that you are in compliance with the law. But most importantly, that money is not being taken out of your employees and your retirement that otherwise does not have to be.

So when we provide this benchmark analysis for you or for people who come in to see us, it’s not uncommon for us to find two to four percent a year when you add up all the fees divided by the plan balance and that could be anywhere from $100,000 to $200,000 a year. So if you have a $2 million plan or a $20 million plan, depending on how big your business is, how many employees you have, these are significant expenses.

How Benchmarking Uncovers Hidden Savings

So your job is to benchmark the cost that you’re paying every single year against what you can get in the marketplace. And again, this isn’t optional. This isn’t something you should do just to be nice. This is required by law and you need a record of this.

So you have a $5 million plan and you’re paying 2 % a year all in for administrative and investment fees. You’re looking at $100,000 a year being taken out of the 401k that you and your employees no longer have for retirement. Maybe 4 % a year up to 200,000. You can do the math based on your company’s plan balance. So when you do the audit and you uncover that administratively you’re paying $42,000 in fees, your job is to compare what’s out there in the marketplace. And a lot of times you can get those same services and oftentimes a lot higher level of service for a much lower cost.

The 401k industry for years and years and years, they know that you’re really good at running your business, but you don’t quite understand the 401k world. So they stack and they layer and they hide all these different fees, they can the paperwork. And most of the times you have no idea that they’re there, but they do exist. So what our job is, is to uncover what these fees are, and then simply compare to what’s out there in the marketplace.

This is going to do two things. One, it’s going to help you understand, but more importantly, it’s going to keep more money in your retirement, more money in your employees retirement. It’s a great recruitment tool. It’s a great just tool to be making sure that you’re staying in compliance with the Department of Labor standards. So you have potential savings, very likely savings. The plans that we look at, you’re looking at about 32 to 65 % between administrative fees and investment fees that you can reduce, that you can just eliminate.

So if your investment fees are 45, oftentimes you do the benchmark audit, you’ll find out that you can have the same typically even higher either quantity or quality investments that are in the top performance tier of their peer group for a significantly lower cost. So now you start to add these up and now you have significant savings for your employees, significant savings in your retirement account and this is what’s required to be done every single year. You need to be doing these benchmarks inside your 401k.

401k Litigation: A Growing Threat for Business Owners

If not, oftentimes that’s when the costs stack up and then that’s when the fines come in. That’s when the potential lawsuits come in. If you just Google 401k litigation, you will see what a rising industry this is for attorneys because most of this is public record. Some of it we have to get from you by requesting your 408b2 document and also your adoption agreement.

Most of this is publicly available. So lawyers are actually searching public records and seeing which companies are paying excessive fees and they’re either filing lawsuit or contacting you for a settlement before they file the lawsuit, threatening you of one.

For those fees, you think you would receive a very high level of service. You think you maybe have one person that you could call that would go on your behalf and advocate for you. But in the industry, that’s not often the case. If you have questions about paperwork, if you need something for your employees, if you have questions about investments, if you have anything whatsoever, you may have to get on the phone.

You’re trying to run your business. You’re busy, you know your business, but your employee needs something, your HR department has to do it, you need something. You have to get on the phone typically and call these people individually. This is not a good service model.

Annual Benchmarking: The Key to Saving Thousands and Staying Compliant

So what we’ve done, and look, this is about benchmarking and you need to benchmark and do that whether you work with us or not, but what we do is we kind of step in the middle, us and our partners, and for any of these issues, if you have something going on, you just simply call us and our team and then we get on the phone and advocate on your behalf for all these people. So like I said, typically 32 to 65 % annual savings and the service becomes much, much better for you because you don’t have to deal with the headaches. That means you can spend more time focusing on your business. But the big takeaway for this video, you must benchmark your costs every single year. Fines are increasing, they’re becoming more frequent and litigation is on the rise.

But you work hard in your business, you care about your employees, there’s no need to pay tens of thousands, maybe hundreds of thousands of dollars that you don’t have to. Let’s keep that money in their accounts, in your account, so we can all have a better, more secure retirement.