Total Cost of Ownership
ShareBuilder 401k is designed to lower your total cost of ownership for 401(k) benefits. There are few products or services in which total cost of ownership matters as much as those in investing. The more spent in investment expenses, the less remains invested in the markets to build for retirement.
Drivers of Investment Expenses and What You Need to Know
Whether comparing which provider to start a plan or weighing whether to switch, determining who has the cost advantage can require a little digging and analysis. Here are some things to consider when assessing a 401(k) plan:
Fund Expense Ratios
Fund expenses will include the fund provider’s expenses to manage and service the fund and can include costs for sales and distribution, revenue sharing, 12b-1, sub-transfer fees, and more. If the average fund expense ratio in your investment lineup is over 1%, that’s a red flag.Recordkeeping, Administration & Custodial Services
These costs may be bundled into investment expenses and/or may or may not be a flat price per participant. It is deducted from your employees’ holdings each quarter—although some employers will pay for some or all of these services directly.Investment Management & Plan Consultation
If your provider is serving as an ERISA 3(38) advisor fiduciary, it protects your firm because your provider is regularly reviewing and maintaining your plan’s investment roster—work that would otherwise fall on your company. Your provider may also offer participant education programs and/or general plan design consultations. Ideally, your provider will provide and perform investment management, education, and plan design consultation at a high level in line with your needs.
How to Uncover, Quantify and Compare 401(k) Costs
- If you currently have a 401(k), review your provider’s 408 2(b) fee disclosure. You may receive multiple fee disclosures if you are using multiple providers. To understand your full costs, you will likely need to add them all together. It may also be confusing, so look out. If this is your first plan, look at the fund lineup expense ratios, setup and administration costs to get an understanding.
- Compare and model out beyond the current year to see the impact of costs over a longer period.
- Assess the compounding effect of high costs on your employees’ retirement savings.
5-Year Cost Comparison Example
Consider this plan starting at $750,000 in assets and 18 participants and how it grows over time with different investment expenses. The company using ShareBuilder 401k would save $57,160 more than a business that has the typical industry 401(k) plan. That's a 50% cost savings!
Average 401(k) Provider Bundled Expense 1.81%*
ShareBuilder 401k Bundled Expense 0.89%*
As you can see, just paying 0.66% to 0.92% more in costs can have big impact on the amount in a 401(k) plan over time.
* This hypothetical example compares a plan starting with $750K in assets and 18 participants in which one company is paying ShareBuilder 401k’s all-in average bundled expense of 0.89% from $750K to $1.5M and then 0.81% thereafter, and the industry average 401(k) plan paying 1.81% from $750K to $1.5M and then 1.47% thereafter. Industry average data is based upon 401k Averages Book 2023 Data and Custom benchmarking report prepared for ShareBuilder Advisors. Cost comparisons are based on plan assets and number of participants and reflect core on-going 401(k) plan expenses that a company and/or its employees can expect to incur as a percentage of assets with most any 401(k) plan. This includes administration, recordkeeping, tax filing prep documents, plan testing, fund expense ratios, and other investment costs passed on to every participant and/or employer to service the plan. It does not include unique employee-initiated transactions such as loans, distributions or employer transactions such as plan amendments. ShareBuilder 401k pricing is based off of standard pricing rates for our typical Safe Harbor 401(k) plan design. The example assumes annual net contributions of $135K and the plan overall achieves 7% in annual returns before expenses. Tax considerations are not considered, and this example does not imply a guarantee of future returns.
Things to Think About When Comparing 401(k) Costs
Keep all-in investment expenses under 1%.
Limit your investment options to low-expense funds.
How does your 401(k) provider(s) earn money on your plan?
How does your 401(k) provider keep costs in check?
This includes the fund expense ratios as well as the three big drivers. Whether you’re just starting a plan or have a plan with $10 million in assets, it is more than doable to keep costs under 1%. We believe this is essential for long-term success.
What percentage of your investment roster is made up of index funds vs. actively managed funds? Index funds typically have lower expenses than actively managed funds. If the majority of funds in your investment roster are actively managed investments, think about how the expenses stack up and whether the fund performance of these over 5 and 10-years align line with their benchmarks and comparable index funds.
We believe the most straightforward and fair approach is to apply a flat investment management expense across the plan to manage ERISA 3(38) services, plan consultation, employee education, and in some cases recordkeeping and custodial services. Warning: don’t be surprised to find that marketing expenses (12b-1s and revenue sharing), share class, and wraps vary by fund with your current provider. Why? How is that fair? These other fees and expenses can unknowingly penalize an employee for picking one fund over another. Also, are you getting the services you want, desire or need to run a great plan at a reasonable price? Does the service really vary by fund?
We automatically lower expenses as your plan grows past identified milestones to ensure pricing remains low for employees. Note: expenses can increase if assets drop and/or participation grows substantially.
Other Costs: Setup and Conversion Charges
Some plans may assess one-time setup and/or plan conversion costs, although there are providers who don’t charge for plan conversions and waive plan setup if the total assets exceed a certain amount.
We Can Help You Compare Plans
If you want some guidance in determining whether your plan makes the most financial sense for you and your employees, we can help by reviewing your costs and even forecasting the impact.