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Thayer Partners Blog

How to Cut 401K Fees by 40% and Prepare Your Employees for Retirement

[fa icon="calendar"] Feb 17, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

How_to_Cut_401K_Fees_by_40_and_Prepare_Your_Employees_for_Retirement.jpgYour company’s 401K plan plays a critical role in both your own retirement as well as your employees’ retirement. However, 401K fees might be costing you far more than you realize, leaving less for you and your employees in retirement. You and your employees also want to be able to take full advantage of all the plan has to offer so that you can prepare for a successful retirement.

Here’s how to do both.

Educating Your Employees to Increase Plan Participation

If your employees don’t understand your 401K plan, how it can benefit them, how to invest, or how they can maximize what it has to offer, what chance do they have for a successful retirement? 401K Plan Education can pull your employees into your plan—making them ready and willing to use it to their advantage so they can be more prepared for retirement.

Having a retirement plan advisor who can provide your employees with group education meetings can help inform them on a range of retirement topics and make them more willing to participate in your plan. However, the gold standard would be to have a 401K plan advisor who offers your employees advice via one-to-one retirement planning meetings each year. Although it can be time consuming and costly (e.g., 20 minutes multiplied by the number of meetings) to educate all of your employees individually, it is usually well worth it because your employees know exactly what they need to do to prepare for retirement and are less anxious—even happier—as a result.

Improving Plan Design

Just as importantly, improving your plan design can push plan participates into action by providing them with incentives to save more. Basic 401K plan designs include a Safe Harbor match, a basic match, or a Roth 401K. But more advanced examples of plan design that can increase participation and better prepare employees for retirement include auto-enrollment, auto-escalation, a stretch match, and new comparability. You might even want to consider pairing your plan with a defined benefit or cash balance plan for maximum pre-tax savings and to reduce your tax bill.

Considering Your Plan’s Mutual Funds

Another way to slash fees on your plan is to use passive mutual funds in your 401K plan’s investment line-up. These index funds are low cost and track their respective benchmark. Though you might think that active mutual funds, run by highly skilled investment teams who pick the strategy and the individual stocks and bonds for your plan, might be the best way to maximize results, more often than not, these active funds actually underperform the market, according to S&P Capital IQ Fund Research. If your plan has active mutual funds, you are likely overpaying and underperforming the market. By switching to low-cost passive index funds, you will be able to save on costs and likely maximize retirement savings.

Fees

Your 401K plan has three basic fee categories—what you pay for the administration of the plan, what you pay your advisor, and what you pay for the investment funds themselves. By making changes to a couple of these three categories, you can save 40%. We’ve already explained how you can save by switching to passive funds, but changing your recordkeeper or third-party administrator can also make a huge difference since fees in that business have dropped significantly in recent years.

Choosing the Right Advisor for Your Plan

For the best retirement outcomes for you and your employees, education and plan design must work together—hand –in-hand.  Having annual (but relevant) group education meetings plus 1:1 advice meetings for all employees will help your employees make more informed decisions as they prepare for retirement. Couple that with the right plan design that includes incentives to save for retirement and you have a recipe for improving employee retirement outcomes.

But the best way to make this happen is to partner with the right 401K advisor—one that can offer your company a retirement plan that is designed to prepare you and your employees for a successful retirement, one that strives to meet the many strict legal standards, and one that offers low-cost, market-tracking index funds.

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Topics: Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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