Small firm workers pay more on 401(k) plans, report says

Employees at small companies pay much higher fees in their 401(k) retirement plans than people at large firms, according to a Bankrate.com analysis.

Over a 35-year career, the average worker at a small business will pay $113,206 more in fees than a counterpart at a large corporation, according to the analysis.

“An employee of a smaller firm will pay three times more in fees, which over 35 years of work is a lot of money,” Sheyna Steiner, senior investing analyst and author of the Bankrate.com analysis, told the Review-Journal.

Steiner said figuring out 401(k) fees can be just as challenging for employers, or plan sponsors, even with federal fee disclosures rules in place. The Bankrate.com analysis also looked at hidden fees and at employees paying fees for co-workers.

“We wanted to get a clearer picture of the impact fees have on the amount of money someone has when they retire,” Steiner said.

Some of the fee discrepancy between larger and small companies is understandable.

Steiner said larger companies have greater economies of scale. She said those firms are able to spread expenses over a larger employee base, thereby lowering the average cost.

For example, if a company has 10,000 participants, those costs are amortized over 10,000 accounts. If a plan has 40 participants, those costs are amortized over 40 accounts.

Larger companies also have “greater negotiating leverage” with 401(k) providers, especially when “buying in bulk,” Steiner said. But there are other reasons for a difference in fees.

Larger companies devote more resources and personnel to manage 401(k) plans. At small companies, the responsibility for the retirement plan often falls to a person with limited financial knowledge or who has a full-time job that doesn’t involve retirement plans.

These are people “who just fell off the investing turnip truck,” said Bankrate.com.

Steiner said participants should be aware of any hidden fees.

Typically, a mutual fund will pay service fees to the transfer agent or custodian. That means assets invested in particular types of funds will pay a fee to the service provider for the 401(k) plan.

There is nothing illegal about building extra fees into mutual fund expenses, Steiner said.

But there is the potential for conflicts of interest, so plan fiduciaries need to know about them.

Participants need to be aware that revenue-sharing fees may not be evenly distributed across the plan; some funds have more revenue sharing padding than others. And that, according to Bankrate.com, may mean some participants are paying higher fees than others within the same plan.

Steiner urged 401(k) participants to pay attention to fees, which should be a key consideration in an investment plan. She said “people don’t understand that a retirement plan does cost something.”

The Investment Company Institute reports that as of Sept. 30, 2012, 401(k) plans held an estimated $3.5 trillion in assets and represented approximately 18 percent of the $19.4 trillion U.S. retirement market.

Just last year, the Department of Labor implemented new fee disclosure rules to help employers and participants better identify costs associated with these investment accounts.

Contact reporter Chris Sieroty at csieroty@reviewjournal.com or 702-477-3893. Follow @sierotyfeatures on Twitter.