Walking the Maze of 401(k)s

Small-business owners are getting a lot more information about 401(k) plan charges—but they're not sure what it means, says a new survey.
Business Writers
September 12, 2012

Small-business owners are getting a lot more information about 401(k) plan charges—but they're not sure what it means, says a new survey

ShareBuilder 401k, which provides plans for some 3,500 small firms, set out to study the effect of a recent federal rule that requires companies servicing 401(k) plans to provide clear information about what they're charging for their services.

The financial advisers, fund companies and plan record keepers had to itemize all the fees they charge as of July. The goal: To help small firms, who do not usually have the muscle to negotiate the best deals on these sorts of things, have a better idea of where their money was going, and be able to explain it to their employees. (As of August 30, the Department of Labor rules require companies to pass this information on to employees.)

But according to Shareholder's study, released today, 83 percent of small firms— defined as those with 100 employees or fewer—still don't understand the fee disclosures. Some 63 percent said they were not prepared to take questions from employees about the fees.

What don't they understand? They don't know if the fees are appropriate or too high. Nearly half (45 percent) said they thought 4 percent—more than double that of the average plan—was a reasonable fee to pay for a 401(k) plan. The average all-in 401(k) fees paid by plans with less than $1 million in assets is between 0.99 percent and 1.83 percent, according to a 2011 study conducted by Deloitte and the Investment Company Institute. Stuart Robertson, president of ShareBuilder 401k, said earlier this year that often employees in small and mid-size companies put the average slightly higher, at 2 percent. 

He said he thinks it should be 1 percent or less. "1 percent vs. 2 percent can be hundreds of thousands of dollars over [an employee's] career," Robertson said. He told Reuters: "It really surprised me that these businesses think that 4 percent is an acceptable amount." (To try ShareBuilder's online tool to compare 401(k) costs,click here.) 

Small businesses thought the disclosure rules would be more helpful if they provided some context for the information.

"There should be some kind of industry average or benchmark," Steve Hazelton, chief executive officer of Newton Software, a San Francisco-based software company with 12 employees, told Reuters. "That would really be helpful."

Photo credit: Thinkstock

Business Writers