Bob Chesner had a sneaking suspicion he might be paying too much for his retirement plan. The partners at his 25-employee law firm had picked their plan 15 years ago, long before technology-driven retirement platforms started to drive down costs. And when Chesner, chief operating officer of Austin-based Giordani, Swanger, Ripp & Phillips, started to dig into the details, he was shocked. Between administration, custodial, and management fees, the old plan cost participants a whopping 2.17 percent of assets each year.
The good news: The technological change that's sweeping through the investment-management industry is dramatically increasing competition for small-company retirement plans. Old stalwarts and newcomers alike are actively competing for retirement plans offered by companies with even just a few workers. That helped Chesner find one charging just 0.58 percent of assets for the same retirement services--a 1.59 percent yearly savings. "This switch will give our people 10 to 15 more years of retirement income," Chesner says. "Fees matter so much."
High tech, low cost
This market was once dominated by insurance companies that charged between 1.5 and 4 percent of assets. But fees charged by newer, tech-savvy firms--including Betterment for Business, Guideline, and America's Best 401k--can be far lower. As Chesner found, that can mean savings for both corporate 401(k) sponsors and participants.
Several of the low-cost providers have been in business for years, but the news hasn't yet reached the small-employer market, says Michael Alfred, co-founder of BrightScope, a 401(k) rating service. If you don't yet have a human resources staff, the 401(k) falls to you, while you're busy "trying to get financing, dealing with customers and products, and making payroll," he says. "Finding the best retirement plan to offer is probably way down on your list."
Another problem is that there is no comprehensive listing of small-company 401(k) providers, what they offer, and what they charge. Nor is there a standard way to report fees, making apples-to-apples comparisons difficult.
Picking how to pay
For instance, Guideline, a new small-to-midsize-plan platform, charges a one-time setup fee of $500. After that, the company levies an administrative fee of $8 per month per participant, each of whom pays on average 0.13 percent of assets per year for both investment-management and custodial services. That gets participants a suite of Vanguard mutual funds they can choose on their own or have Guideline help select.
Vanguard, which launched a small-plan division five years ago, charges employer sponsors an annual service fee of $3,475 for the first 15 participants, and then adds an annual fee of $75 per participant for the next 35 employees. That makes the mutual fund giant relatively expensive for very small businesses, but less costly for plans that have a large number of participants.
Meanwhile, America's Best 401k, the provider that Chesner chose, charges an annual administrative fee of $1,600 plus $24 per participant, while employees pay an asset-based fee of up to 0.7 percent.
Recognizing that comparing all these fees is difficult, America's Best offers to do it for any prospective customer. That leads some business owners to become pretty upset when they realize the cost of their current plans, says Tom Zgainer, chief executive and founder of the Scottsdale, Arizona-based company.
"This dentist we talked to yesterday thought he had a great plan. It was sold to him by a friend of his," says Zgainer. "He had no idea how much he was paying."