One of the benefits of a company 401(k) should be getting a bulk discount on your 401k fees. No matter if you invest in an IRA or a taxable account there will be fees. However, you can buy the same investment in your IRA or previous 401k and pay significantly higher fees.
Cut fees on toilet paper by buying in bulk why not investments
Most of us are aware that we can buy the same toilet paper at a convenience store, grocery store for a cost, the convenience store carry smaller volume sizes at higher prices. The grocery store usually has a few more size options and is less expensive than the convenience store. However many people have found it useful to buy at discount clubs where you get a very large volume at still a lower price.
Investments are much the same. Many investment companies sell the very same packaged investment through different outlets at different prices. The company 401(k) is one of the places where one can buy at even lower prices. Investment companies have different ways that they discount. Individually you may buy more and get different cuts in fees the more you buy. The same opportunity typically exists in your 401k. The 401(k) book of Averages shows that investments bought at some of the very largest multibillion-dollar retirement plans are even lower than those of the billion dollar plan variety.
Buying more does not mean automatic 401k fee reduction
What some people are not aware of is that investment discounts are not automatic. You may qualify for the discount but not get it. This is especially the case if you are not working with a provider that is an investment fiduciary. Fiduciary providers must work in the interest of their clients. Non-fiduciary providers may have the interests of others before yours. Unfortunately if you are an unsuspecting fiduciary the law considers it your responsibility to actually ask for those discounts. There have been several lawsuits lost by companies that did not manage 401k fees.
Consider 401k fees when considering a rollover
Often there are times that a company fiduciary may actually have accounts from previous employers. If they were to consolidate those investments into their company retirement plan all things being equal they would get an increase in their rate of return because of the discount. You may have heard that it is often the case that they can get greater choice for their retirement investments if they move their money to an IRA. You actually need to make sure that that investment you are moving into will not have that flexibility eaten up from the increase fees from the investment. For example, an investment that has a 1% higher fee in the IRA with a similar risk and return profile would actually be harmful rather than helpful.
I know of a situation where two owners had separate 401ks. By combining their accounts into one account, they would now qualify for discounts. Just like buying at the warehouse, combining their purchasing power, they would cut their 401k fees.
$170,000 bigger balance because of 401k fees?
The non-partisan Government Accounting Office reported that cutting 401k fees (investment expense ratios) by just 1 percent yields a 17 percent difference in asset value over 20 years.1 Would you rather have a $1,000,000 balance than an $830,000 one? To clarify, that means that higher fees on the same investment could result in a loss of $170,000.
No time to audit 401k fees?
Have you audited your 401k fees recently? Better yet, have you looked at your investment menu to see if certain investments have equivalent lower cost ones? Morningstar, the popular investment research firm, said that investment cost is a better predictor of future performance than their star rating. “Investors should make expense ratios a primary test in investment selection. They are still the most dependable predictor of performance. Start by focusing on investments in the cheapest or two cheapest quintiles, and you’ll be on the path to success.”2
Have you audited your fees recently? Better yet, have you looked at your investment menu to see if certain investments have equivalent lower cost ones? If you don’t need one more thing on your plate, call us or another retirement consultant that offers this service as part of the package of services.
(1) Private Pensions: 401(k) Plan Participants and Sponsors Need Better Information on Fees, Government Accountability Office, October 2007
(2) How Expense Ratios and Star Ratings Predict Success, August 9, 2010
(3) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(4) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
(5) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.
