The Importance of Having a Low-Cost 401k Plan

It is an unfortunate fact that high-cost 401k plans litter the employee benefits landscape. Employees deserve better! In the prior article, we discussed how such plans can make their sponsors vulnerable to a lawsuit which is both time-consuming and expensive, not to mention a potential public relations disaster. In this article, we will explore the potential damage to employees’ retirement savings from participating in a high-cost plan using a real-world example.

We recently encountered a company with about $50 million in its 401k plan. Their average annual fund expense ratio was running at 0.86% but moving the current funds into similar Vanguard Admiral share class funds would lower it to 0.09%.

Here is what that means for a typical employee just starting out. We will assume 40 years of savings starting at $6,000 and increasing by 3% annually for inflation. Our assumed rate of return (before fund expense ratios) will be 6%. At the end of the 40 years, our hypothetical employee would have $1.197 million under the high-cost plan vs. $1.418 million under the low-cost plan, a difference of $221,000. Another way to express it is that he or she lost about 16% of potential retirement savings to unnecessarily high costs, which undoubtedly would have a substantial impact on the standard of living in retirement.

If you are in the unfortunate position of participating in a high-cost plan, you have our sympathy, and you may want to consider bringing it up to whoever is responsible for the plan, but remember, there is no need to do it alone. In the meantime, it certainly makes sense to contribute whatever is needed to obtain the full employer match. For additional savings, consider either a traditional or Roth IRA, but please be aware of the income limits mentioned here under “Important Retirement Contribution Limits for 2019.” If you would like us to evaluate your plan to see where we could potentially improve it, please call us at 800-345-4635 or email us at advisors@clarityca.com.