If you own a small business, the time to comparison-shop for 401k plans has never been better. Low-cost plans are cropping up, as new federal regulations kicking in this year call for greater disclosure of fee information to plan participants and sponsors.
The numbers should be a real eye-opener. Fees vary widely among retirement plans -- anywhere from well below 1 percentage point to a whopping 5 percent. Yet 71 percent of retirement savers don't think they pay any investment fees at all, according to a recent AARP survey.
That's a significant issue, since fees are one of the most important factors determining success or failure in meeting retirement goals. Small workplace retirement plans have some of the highest all-in costs in the industry.
But as Sam Cooke crooned so memorably: a change is gonna come.
The 401k Fair Disclosure for Retirement Security Act takes effect in April.
To compete in the new environment, some of the industry's leading retirement plan providers are launching new low-cost offerings aimed at small plans. The most important entry to date is from Vanguard Group, a leader in low-cost passive index fund investing and a big player in workplace plans. Vanguard launched a new initiative last fall targeting retirement plans with assets up to $20 million; although the new offering includes some actively managed fund options, the platform really is built around Vanguard's very low-cost index funds.
Costs charged by plan providers vary by asset size and number of participants. But Vanguard offers up this example: The all-in cost for a plan with $5 million in assets, an average account balance of $50,000, and an investment lineup of Vanguard index and active funds would be 0.32 percent. By comparison, the industrywide average total plan cost for plans with less than $5 million is 2.09 percent, according to Brightscope, which analyzes 401k plan performance and trends.
Charles Schwab launched a new low-cost offering earlier this month centered around passive investing, although the company is focusing on plans with at least $20 million in assets. Schwab's plan will cost participants 65 to 70 basis points, with financial advice included, or $650 to $700 in fees on a $100,000 account. Without the advice, the cost to participants is about 20 basis points.
And TIAA-CREF, a market leader among non-profit plans, recently re-launched its 403(b) platform with a focus on low cost. All-in cost ranges from 50 10 150 basis points, according to John Hays, managing director for the nonprofit sector at TIAA-CREF. "This is one of the fastest-growing areas in the non-profit market," Hays says.
Along with fees, financial advice and education are key elements of the emerging workplace plan market. Vanguard and others focused on small plans incorporating advisory services --
by working closely with registered investment advisers (RIAs) who have fiduciary duty to make unbiased investment recommendations to plan participants. Vanguard says half of the proposals it is sending out are being requested by RIAs.
Vanguard's entry should give a meaningful jolt to the small end of the workplace plan market. Fidelity Investments has been a large force in the small-plan market for years, and says it currently serves 16,000 plans representing roughly 1.7 million participants. Other key players include Principal Financial Group and the Hartford insurance company.
"Vanguard's arrival should get everyone's attention," says David Huntley, publisher of the "401k Averages Book," an industry guide to plan fee information. "I think it's exciting - not just because of their reputation for low cost. They also have a great reputation for service in this industry."
The market response to the new Vanguard offering has been strong, says Kathy Fuertes, head of Vanguard's Retirement Plan Services for small business. "We're substantially above what we had forecast."
Fuertes adds that many of the inquiries it has received come from employers who are considering starting retirement plans for their workers for the first time. "This is a very high-cost marketplace and there weren't a lot of options for small businesses who were cost-conscious," she says.
(The author is a Reuters columnist. The opinions expressed are his own.)
(Editing by Lauren Young, Beth Pinsker Gladstone and Andrea Evans)