In the past, 401(k) plans were designed and priced for large corporations. However, given the fact that 99.9% of businesses in America have 500 or fewer employees, providers like Ubiquity now offer low-cost, easily-administered solutions geared toward small businesses looking to start their first plans.
Whether you’re a solopreneur or you have 100 employees, your business is the right size for a 401(k) plan!
As a 401(k) provider for small business Ubiquity is here to help you:
- Get the right-priced 401(k) for your business.
- Understand retirement price structures.
- Learn to uncover sneaky hidden fees that are all too common in the industry.
You deserve a fair-priced small-business 401(k) plan that provides complete transparency on exactly what you’re paying for and why. You don’t necessarily have to match what your employees put in, but there are flexible options and tax savings if you do. No matter what retirement savings plan you choose, offering 401(k) benefits attracts better, long-term employees who feel valued and vested in your company.
Small Business 401(k) Cost: Types of Fees
Financial institutions have a reputation of hiding the true cost of retirement plans. To fully understand what you’re being charged for on your plan statement or the cost of a potential new plan, it’s important to understand all of the different types of fees you can be charged
1. Assets Under Management Fees (AUM)
Most 401(k) providers charge asset-based fees on total account balances for the management of the portfolio, investment advice, investment fees, and custodian compensation.
The problem with AUM fees is that the more your portfolio grows, the more money you pay to the provider, and the less your employees get to keep for their retirement.
Let’s say you have a 1.5% AUM fee. That’s $1.50 you pay to the provider per every $100 in your 401(k) account.
If you have invested more than $500,000, you’d be paying $5,000 (with a 1% AUM fee) to $7,500 (with a 1.5% AUM fee).
You may also be charged a fee by your provider if your plan fails to reach certain asset levels.
2. Flat Fees
Flat fees are among the most transparent in the industry, as you are charged a fixed rate – either monthly, quarterly, or annually. The dollar amount never changes, no matter the size of your account or the success of your investments. These fees can vary widely, depending on your plan provider, and are typically paired in tandem with per-person fees.
Ubiquity’s flat-fee 401(k) plans for small businesses range from $19 to $257 per month, based on the level of service you provide and whether you are a sole proprietor or a small business owner with employees.
3. Per-Person Fees
Many flat fee providers also charge per-person fees — also known as per-participant or per-head fees – based on how many people are enrolled in the plan. These charges are meant to cover the provider’s administrative and recordkeeping expenses under the justification that it costs them more to manage portfolios for 1,000 employees versus 100. Beware of providers who charge low all-in fees, but sneak in higher per-participant fees. At Ubiquity, we do not charge additional per participant fees.
4. Transaction or Individual Service Fees
Transaction fees may be charged in tandem with asset-based fees or flat-fee structures. Triggers for transaction fees may include changing a fund line up, withdrawing a loan, taking a distribution, or using premium investment advisory services. Frequent or high-cost transaction fees can be a major drain on your savings.
Tips for Comparing 401(k) for Small Business Costs
A 401(k) for small business owners is not the same as a 401(k) for a sprawling multi-national corporation.
If you currently have a 401(k), review your provider’s 408 2(b) fee disclosure.
Since July 2012, the Department of Labor has required plan providers to provide notice of all fees and services provided. Benchmarking to compare competitor fees is the best way to ensure fairness. Review proposals from multiple providers, identifying the compensation paid to each, including indirect compensation paid for with plan investments. Evaluate the experience of each provider to determine if there are any conflicts of interest.
Enter data into the Department of Labor’s 401(k) fee disclosure worksheet to compare.
If this is your first plan, look at the fund lineup expense ratios, setup, and administration costs.
For many plans, the 401(k) expense ratios are way too high. The expense ratio refers to the percentage of retirement fund assets that plan participants pay for their investments. This percentage-based charge includes the cost of administering the plan, operating fees, recordkeeping, management, investment fees, and marketing expenses.
Compare and model out beyond the current year to see the impact of costs over time.
The 401(k) Book of Averages found that employees at a 10-person small business could pay anywhere from 0.25 to 1.92 percent, with the average being 1.34 percent. Hearing that you’re paying a 1.34% expense ratio may not trigger a panic, but learning you’ll have half a million less in retirement savings is certainly a cause for concern.
Assess the compounding effect of any fees or high costs on your employees’ retirement savings.
Much of the total expense ratio derives from the type of funds selected by the plan sponsor or advisor. Actively-managed funds have significantly higher fees than passively-managed funds. Mutual fund share classes may carry additional 12b-1 fees that drive up costs. There is no reason why you can’t replace high-cost actively managed funds with high-quality passive index funds.
Remove any mutual funds that charge the infamous 12b1 marketing fees to put 0.25 to 0.75 percent more money in your pocket. Fund options are always changing, so it’s wise to shop around and re-evaluate your performance one to four times a year.
