Fiduciary Fee Study
Small business 401(k) plan costs can benefit from fiduciary-grade advice, a practice that will be mandatory via the DOL’s new Retirement Security Rule.
Fiduciary-grade investment advice can reduce the expenses of administering a 401(k) plan, including those of small businesses, according to a data deep-dive by Employee Fiduciary, LLC, a provider of 401(k) recordkeeping and third-party administration services.
When fees are taken from 401(k) participant accounts, they directly decrease returns, resulting in less money available to grow over time, Employee Fiduciary President and CEO Eric Droblyen noted in the report. These fees can ultimately reduce a worker’s retirement savings by hundreds of thousands of dollars and mitigate the success of offering a workplace plan.
To gauge just how much fiduciary advice can help reduce plan costs, the firm looked at annual fees charged by 1,109 fiduciary-grade advisers. The results first confirmed that fees dropped as plan assets grew, dropping on average from 0.65% to 0.50%:
Plan Asset Range | $0-$500k | $500k-$1mm | $1mm-$5mm |
# of Plans | 564 | 202 | 343 |
Average Assets | $189,367.06 | $725,229.23 | $2,905,250.67 |
Average Participants | 18 | 22 | 79 |
Average Fee | 0.69% | 0.64% | 0.47% |
Median Fee | 0.65% | 0.60% | 0.50% |
Then, Employee Fiduciary merged its own fees with adviser fees across the plan sizes, finding fees as a percent of assets ranging from 1.63% down to 0.62% total:
Plan Asset Range | $0-$500k | $500k-$1mm | $1mm-$5mm |
# of Plans | 564 | 202 | 343 |
Average Assets | $189,367.06 | $725,229.23 | $2,905,250.67 |
Average Participants | 18 | 22 | 79 |
Employee Fiduciary Fee | $1,924.48 | $2,291.68 | $8,618.94 |
Advisor Fee | $2,041.43 | $4,803.96 | $22,479.65 |
Total Fees | $3,965.91 | $7,095.64 | $31,098.59 |
% of Assets | 1.63% | 0.95% | 0.62% |
Finally, Employee Fiduciary compared the outcomes to the national average as drawn from the 401k Averages Book, which found an average plan fee of 1.71% for bundled plan administration services of plans with $500,000 in assets. The figure “was higher than the 1.63% average we found for smaller plans,” the recordkeeper concluded.
Employee Fiduciary’s Drobylen tied the findings to the recent introduction of the Retirement Security Rule by the U.S. Department of Labor, which redefines “investment advice fiduciary” under Employee Retirement Income Security Act to include small defined contribution plan advisement.
The final rule is currently facing industry-driven lawsuits, but otherwise is planned to go into effect September 23 in terms of advisers declaring themselves fiduciaries, with other reporting needs and exemptions to kick in at a later date.
“We fully support the new rule,” Droblyen said in a statement. “Our study demonstrates that fiduciary-grade investment advice lowers the total cost of 401(k) plans, resulting in higher returns for participants and more savings to compound until retirement.”