I began to look at the fees in our 401k plan and what I found was disturbing.
It began with a look at my own statement. After some analysis I was shocked to find out that about 38% of my workers’ retirement was going to fees.
That’s right. The percentages seem small, but when you model it out over the course of a worker’s career, the fees really add up. That was about $420,000 of lost investment income that was paid out to fees by retirement age. Think about that for a minute. Imagine that, after a long career of struggling to save as much as you can, you have finally reached retirement age. Your long time financial adviser shows up at your door and asks you for payment for his services over the years. You look at the bill and it’s $420,000. Would you pay it? I wouldn’t either.
What’s more, I belatedly realized that I, as the plan trustee, could be held personally liable for having a plan with excessive fees.
After considerable effort, we were able to get the fees down from 38% to 5%, while offering better service, better investment choices and lower costs for the company.
Unfortunately, it can be difficult and time consuming finding the right retirement plan for your business, particularly one that is not expensive–for you the owner and your employees. The good news is that there is a light at the end of the tunnel, and it’s not a train. CFO Network is available to help you through the process, so you don’t have to reinvent the wheel and go through the painful and time consuming process by yourself.
Since our founding in 2004 we have had a traditional 401k with me as the trustee. In the early years, we were running around crazy trying to grow and get the business solidly off the ground. I knew that I had created messes along the way, and over the years I’ve gradually been able to circle back and clean things up. One corner of the business that I hadn’t revisited was our 401k plan. I had always just signed the documents, signed the checks and moved on with other things.
Early last year I decided to carve out half a day and take a look at our plan. I had read a few articles about high fees and I even watched a very good documentary on the subject by Frontline, so I was interested in understanding the fees in our plan. I started by looking at my own statement and picked a mutual fund that I could use as a comparable benchmark to an overall market index. I had been in this fund for a while so I looked at the last five years’ returns compared to the index. It was about a third less. I wondered if it was just bad investing or if the fees could account for the gap. That’s when I dove into the fine print of our plan and ferreted out all the fees.
There are several of them, and it turned out that the fees explained all of the gap in performance. The good news is that the fees are disclosed (as mandated by law). The bad news is that they are buried in an ocean of small font legal disclosures, scattered all over the place and generally hard to understand. And I have an MBA in Finance.
Eventually we radioed out to our financial adviser, an amiable fellow who came in to talk to our employees once a year about the markets and what his recommendations were for investments. He brought in the rep from the other firm we used for the investment platform (they will remain anonymous). Unfortunately, this was no help, as I came away no more knowledgeable about our fees than before. And frustratingly, they told me it was ‘good that we called’ because they had flagged us to come talk because we were on ‘an old plan’ and they wanted to lower our fees (as if, had I not called them, they would have called me to come lower my fees on their own). Ok, whatever. Anyway, the day came when they met with us to show us the new fees. The good news was that they were lower. The bad news was they were still amazingly high. What they didn’t know was that we had been researching alternatives and found some very good ones. If I had continued with our amiable adviser, they would have gone from taking 38% of my workers’ retirement down to 33%. The new solution we had found was going to take it down to 5%. Big difference.
The next task was to make sure we were going to get good service, good investment choices, etc. We spent time with our employees understanding their needs and educating them on the various alternatives. We spent a lot of time researching, asking questions and evaluating. Ultimately, we found the best one and are delighted with the result.
After telling our story locally, we started looking at other companies’ plans. We found that we were not an isolated case. So we have decided to leverage our learnings and experience to help others make sure they are in the best plans.
I want to be clear: CFO Network is not part of the financial services industry. We do not accept any form of compensation, either directly or indirectly from the financial services industry. We have nothing to sell you except our experience and desire to help you get to a better place. After our experience, are passionate about this subject and want to help. What’s even better: our smart analysts have developed a great model for helping us quickly and efficiently evaluate your plan, and in most cases we are able to do the initial evaluation for FREE! So there’s no harm in contacting me today!