Many bundled 401(k) plans offered to small practices can have very high fees, which include mutual fund fees and other asset-based fees. Fees average about 1.5% but at the high end of the spectrum fees can be as high as 4%. These AUM (assets under management) fees always grow as your account grows. The compounded cost of these fees can reach into hundreds of thousands of dollars for a typical 401(k) account.
Table 1. The cost of a 1.5% asset-based fee vs. 0.2% fee (which is an average expense ratio for Investor Shares of Vanguard mutual funds).
So a plan with an average of 1.5% mutual fund expense ratio can potentially cost you as much as $1M over 30 years.
Table 2. The cost of a 0.7% asset-based fee vs. 0.2% fee.
Even if you happen to have a plan with a 0.7% all-in fee (that might include administrative and other fees bundled into a single asset-based fee), such a plan will cost you over $500k in extra fees over 30 years, especially if you are contributing as much as $75k (which is typical for a plan where a spouse employee is also on the payroll). Some doctors and dentists will also open Cash Balance plans to accelerate saving, so asset-based fees also hurt such plans disproportionately.
Table 3. Plan #1 charges 0.7% + a fixed fee of $2,000 vs. Plan #2 that charges a fixed fee of $6,300 and has a 0.13% mutual fund expense ratio.
Table 3 shows the effect of asset based fees on your plan for a flat fee provider vs. a typical bundled provider who charges a mix of fixed and asset-based fees. Fortunately, it is not necessary to pay any asset-based fees for your retirement plan aside from the cost of an index fund portfolio (for which the fee can be as low as 0.13%). The good news for a practice owner is that they do not have to pick a plan with high fees – much better lower cost alternatives are available. A customized plan can be designed for your practice for a single flat fee allowing you to save hundreds of thousands in long-term expenses and providing you with the highest level of services (including investment management) to help you achieve better investment results and to meet your retirement goals.
