Benefit Strategies
What A Drag
A Bundled Plan Can Cost Plenty!
The hidden charges in most bundled 401(k) plans can create a substantial drag on plan assets over time.
As an example, consider a 30-year old employee with a current account balance of $25,000. If gross returns on investments in the account over the next 35 years average only 7%, and fees and expenses reduce average returns by 0.5%, the account balance will grow to $227,000 at retirement … even if there are no additional contributions to the account.
But if fees and expenses are 1.5% - as they are in most bundled plans - the account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce the account balance at retirement by 28%. Using these assumptions, the reduction in value to all plan accounts is even more dramatic.
In a plan with 10 participants, the total difference would be a whopping $640,000, and a plan with 100 lose a staggering $6.4 Million.
But costs are not the only consideration. By unbundling your plan offering, plan sponsors can tap into an open-architecture platform for investment management, with no hidden fees or favored funds, unbundling also allows for the choice of a best-of breed third party administrator and recordkeeper along with custody and trustee services. Finally, an unbundled plan can be just as automated and more responsive than an unbundled plan. If any one component of the plan needs to be upgraded or replaced, that change can be done without disrupting the entire plan.
When reviewing proposals from bundled plan providers, be sure to study the contracts and fees to determine what you will actually be paying in terms of billed charges, as well as hidden charges. If you need help in evaluating a proposal, or to learn more about an unbundled 401(k) solution, give Don Potter a call at 540-989-2020.