The lifeblood of your growing business is the intellectual firepower and energy of your employees. Keeping those brains engaged and motivated--and not hightailing it to the next better opportunity--probably crosses your mind all too frequently. As does making sure you can keep attracting new talent to your enterprise.
Salary, stock options, and equity are certainly the most valuable currency you have to trade with employees and prospects. But you're probably overlooking another valuable carrot: a killer 401(k) plan.
Tell me you wouldn’t jump at the opportunity to be able to hit your staff and prospective hires with this pitch: “Our 401(k) is so state-of-the-art I am confident we can boost your retirement stash by six figures.”
Make your Employees Rich(er) by Getting Really Cheap
What I am talking about is giving your 401(k) a fee audit. If you find it’s a fee-laden program push your provider to clean it up. If that’s a non-starter, it’s time for an upgrade.
I realize you--or your CFO--are probably dreading the time suck that switching vendors can entail. I hear you; I know your day is already too short for all the work involved in building your business.
But the fact that you offer a 401(k) tells me you know the value of operational excellence as well. You already appreciate the need to offer this valuable benefit.
Problem is, you may not fully appreciate that the plan you have isn’t likely best-in-class. According to a study conducted for the mutual fund trade association, smaller 401(k) plans get hammered on fees. The median all-in cost for 401(k) fees is 0.72%, but plans with less than $1 million in assets paid a median fee of 1.9%. Plans with assets between $1 million and $10 million paid a median annual fee of 1.3% of plan assets.
Making matters worse, until this past summer when new fee disclosure regulations kicked in, it was maddeningly difficult to figure out your plan’s all-in fees. But now that you’re receiving that important disclosure from your plan provider, you can more easily ascertain what you and your employees are forking over each year in expenses.
If your plan’s all-in annual expense charge is higher than 1%, I think you can do better. A lot better. With the advent of super-low cost exchange traded funds (ETFs) and the availability of some equally cheap mutual funds, there’s no reason your company’s 401(k) can’t have total all-in annual costs of 0.50%.
How Much It Matters
Can’t get too worked up about the difference between 0.50% and 1.9%? Well, this is where my earlier pitch comes into play. Let’s say a 40-year-old employee invests the 2012 maximum contribution limit of $17,000. And just for the sake of a simple example, we’ll hold that amount constant. Next, let’s assume a 6% gross investment return. In 25 years, at age 65, if your employee had 1.9% shaved off each year in expenses, her retirement fund would be worth nearly $770,000. If instead, the average annual expense charge was 0.50%, she will have nearly $950,000.
That’s your six-figure sales pitch. You just don’t offer a retirement plan, you offer a best-in-class retirement plan that materially adds to every employee’s future retirement security. Moreover, that bigger balance doesn’t require making aggressive asset allocation bets. It’s simply a function of the plan charging lower fees. If only every part of your business could be upgraded without taking on more risk, right?
But that’s exactly the opportunity you have by upgrading your 401(k) plan. The cheaper you make it, the richer your employees can be in retirement. That’s a compelling benefit for all.