Why are fees so important?

Why are fees so important?

Every day, I talk to employers who are 401(k) plan sponsors about fees. And the number one question I ask everyone is, “Do you know what ‘just .5%’ means to your employees?” The answer I get most of the time is that .5% is “minimal”. But in reality, .5% can represent a substantial reduction in your employees’ returns.

The actual return that a 401(k) plan participant realizes is the return of the investments minus any fees. I refer to this as the “net investment return” (NIR).

For example:

Suppose Bob has $8,000 deposited into his account each year, comprised of both his and his employer’s contributions. After 30 years at 7% NIR, Bob’s 401(k) plan balance would be approximately $808,000.

If Bob’s 401(k) plan fees were increased by .5%, the NIR would be reduced to 6.5%, and his plan balance would be approximately $736,000.

If his 401(k) plan fees were increased by 1%, the NIR would be reduced to 6%, and his plan balance would be approximately $670,000.

The 1% increase in fees represents a loss of $138,000 to Bob. If there were 50 people in the plan and they are all contributed the same amount, the difference would be $6,900,000.

Now I know that not everyone is going to contribute the same amount. However, numbers do not lie. For someone who contributes less, the difference in the plan balance will be less; and for someone who contributes more, the difference will be greater.

I do side-by-side comparisons all the time that show how fees impact a plan’s success. If you are the plan sponsor, you have a fiduciary responsibility to the people who participate in your plan to monitor fees and ensure they are reasonable. With all the lawsuits that are taking place in the 401(k) world, plan sponsors need to take that responsibility seriously.

Apollo Wealth Management can help. Talk to us today to ensure you’re meeting your fiduciary obligations as a 401(k) plan sponsor.