Orchid Wealth Management
  • Home
  • About
  • Individuals
  • Plan Sponsors
  • Contact
  • Blog
  • Privacy Policy

Objective Retirement Investment Advice
from Orchid Wealth Management

Take a moment to reflect on your retirement investment goals.
Our blog has comprehensive insights for business leaders, management and individuals
​to strengthen fiduciary competence and practices. 

Are San Francisco Bay Area Retirement Plans Paying Excessive Fees?

3/27/2017

1 Comment

 
Picture
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.

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.
​
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.
​​
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.
__________________________________________________________________________________________

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.
​
Picture
1 Comment

    Author

    Seth Swenson, MBA 
    President and Lead Advisor at Orchid Wealth Management
    in Palo Alto CA.

    Archives

    May 2023
    March 2022
    April 2019
    February 2019
    August 2017
    May 2017
    April 2017
    March 2017

    Categories

    All

    RSS Feed

​Orchid Wealth Management is a California registered investment advisor.
​WEBSITE CONTENT DISCLOSURE
 
All written content on this site is for information purposes only. Opinions expressed herein are solely those of Orchid Wealth Management unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.  

This website may provide links to others for the convenience of our users.  Our firm has no control over the accuracy or content of these other websites.




REGISTRATION INFORMATION
 
Advisory services are offered through Orchid Wealth Management; an investment advisor firm domiciled in the State of California. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute.
 
Follow-up or individualized responses to consumers in a particular state by our firm in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

For information concerning the status or disciplinary history of a broker-dealer, investment advisor, or their representatives, a consumer should contact their state securities administrator.

​
Photos from Marco Verch (CC BY 2.0), verchmarco
  • Home
  • About
  • Individuals
  • Plan Sponsors
  • Contact
  • Blog
  • Privacy Policy