June 14, 2016

401k's Usually Have High Fees But Most Peoples 401k Does Not

You may have heard that 401k's often have high fees.   They do.   Most 401k plans are charging high fees just for the 401k itself.    Thats bad and erodes peoples retirement savings.    But while most 401k's may have high fees, that doesn't mean that most people have bad 401ks at their jobs.    Let me explain..

When you look at all the 401k's out there you'll be looking at lots of 401ks offered by small businesses.   Small business plans have 401k's with a few employees and relatively low balances.   Those plans tend to have higher fees as a percent of assets.    This is due generally to overhead costs and scale.    Large companies have 401k's with many 100's of employees and millions of dollars of assets.   When the 401k administrator figures the fees it can be a much lower percent of assets due to volume.    Large 401k market is also much more competitive so you get lower prices that way.

Generally small companies have high 401k fees and large companies have low 401k fees.     But since there are far more small companies then there are far more 401k's with high fees.     On the other hand most people work for the larger businesses and then they have 401ks with lower fees.

Combine that all and you get :

The average 401k has high fees.   - AND -  The average persons 401k does not have high fees.

The GAO report  401(K) PLANS Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees (from Apr. 2012) has this chart showing average fees based on plan size :

So while the average 401k had a fee of 1.13% the large plans were only at 0.15%.   Plans with 50-400 people were paying 0.24%.    And the majority of people work at companies with > 100 employees.

Looking at BLS data on employment by firm size  (figures dated 2009) we can see that ~60% of people work at companies of 100 or more.     38% of people are employed by companies over 1000 employees.

Whats more the small 401k's offered at small companies with under 50 people are even worse than the average and they charged 1.33%.

Bottom line :   As far as fees, the 401k's at small businesses are usually bad but big  companies offer decent 401ks.


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