Are San Francisco Bay Area Retirement Plans Paying Excessive Fees?

Is your San Francisco Bay Area company overpaying for its 401(k) plan or 403(b) plan? Plan sponsors of retirement plans have a fiduciary duty to their employee participants. As a fiduciary a plan sponsor must keep the best interests (including financial) of their employee participants in mind. This means that if there are lower cost ways to administer the plan then they should be considered.

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Plan sponsors should benchmark their retirement plans on a regular basis. This means the plan services and fees should be compared with what is currently available. 401(k) plans are often established and implemented with the set and forget approach. This can cause problems in the future when the plan’s assets grow and the fees increase at the same rate of growth. Many companies are facing litigation from employees due to alleged excessive fees.
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When a plan utilizes “revenue-sharing” the services are being paid for mostly by the mutual fund fees, which are being paid for by the plan participants. These services that are being paid for through the mutual fund fees include record keeping, third party administration, and custodial services. Plans that use revenue-sharing tend to have funds and investments with fees that are much higher than necessary.

As an alternative to revenue-sharing, the record keeping, third party administration, and custodian fees can be “fixed per participant”. This means that the mutual funds and investment lineup selection can have significantly lower expense ratios. A “fixed per participant” fee model prevents a 401(k) or 403(b) plan’s fees from becoming excessive as the assets within the plan grow year after year. Instead the fees increase nominally per participant. Using this type of fee structure can result in plan participants reaching their retirement goals more efficiently and plan sponsors meeting their fiduciary duty more reliably.

Here are two recent examples of San Francisco Bay Area 401(k) plans which have 401(k) plan fees that can be reduced significantly:

Plan 1)  A Bay Area distribution company with just over $100,000,000 in 401(k) plan assets is paying $916,735.00 per year, including $823,389.00 in annual mutual fund expenses. The total “all-in” cost for the plan is .83% of the plan’s total assets per year. Based on an initial analysis, the plan could reduce its mutual fund and investment lineup fees to $229,636.00, and its “all-in” fees to $483,336.00 or .43% of the plans total assets. This is a total annual savings of $433,398.00. In just ten years, this becomes $6,251,130.00 when compounded annually at 7%. This is a 47% reduction in annual fees. This example assumes that the current annual fees are stagnant, which they are not, so the savings would likely be greater. 

Plan 2) A San Francisco Bay Area construction company with approximately $49,000,000.00 in 401(k) plan assets is paying $329,000.00 per year in fees, including $320,000.00 in annual mutual fund expenses. The total “all-in” cost for the plan is .66% of the plan’s total assets per year. Based on an initial analysis the plan could reduce its mutual fund and investment lineup fees to $57,000.00, and its “all-in” fees to $138,000.00 or .28% of the plan’s total assets. This is a whopping 57% reduction in annual fees. This is a total annual savings of $190,000.00. In just ten years becomes $2,500,000.00 when compounded annually at 7%. This example assumes that the current annual fees are stagnant, which they are not, so the savings would likely be greater. 

These examples are actually the rule and not the exception. Companies and retirement plan advisors take advantage of plan sponsors by putting their own best interests before their client’s best interests. The result is excessive fees and ambiguous retirement plan costs. This is not an excuse for the plan sponsors however, and it can even lead to personal liability for any person who is seen as a plan administrator. Simply not benchmarking a 401(k) plan and thus being unaware of current options may be interpreted as a breach of fiduciary duty.

In summary, by getting a second opinion from a Registered Investment Advisor rather than a Broker Dealer, a plan sponsor is more likely to receive objective advice as opposed to commission driven advice. Cutting a retirement plan’s fees can make the difference between employees reaching their retirement goals on-time and falling short of their goals and thus having to work additional years. It may also be the difference between a plan sponsor being sued for breach of fiduciary duty and not being sued.
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Orchid Wealth Management is a Registered Investment Advisor and offers complimentary, objective 401(k) plan benchmarking. Orchid eliminates revenue-sharing in retirement plans and ensures transparent, easy to understand fees that do not become excessive and increase liability.
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Orchid Wealth Management has a stress free strategy to help you grow your portfolio.
Call Seth Swenson at (650) 334-6104 to schedule a free consultation. Thank you.
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