Are you Over Paying for Your 401(k) Plan – Doctor?

Posted on June 11, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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Checking it Twice

By Guy P. Jones CFP® http://www.guypjones.com

Guy P. Jones CFPMany of the doctor and medical professionals I meet are surprised to find that their 401(k) plan has hidden fees. They often don’t have or take the time to learn all the aspects of setting up a new plan.

As a consequence, they often times buy what I call “The 401(k) in a Box” from the first provider that comes along or from a current vendor that is providing ancillary services for them.  Many plans have significant hidden fees and this is especially true of 401(k) plans offered to small businesses like a medical practice or clinic.

According to a recent study, the average 401(k) plan has hidden fees of 0.72% per year. That may not seem like much but it costs the average participant about $11,000 over the lifetime of their participation. That’s $350 per year – and the fees are extracted directly from the 401(k) your account!

But, what about doctors and small business owners whose 401(k) plans have fewer than 20 employees and less than $1 million in total assets?

Well, their situation is much worse. For these small 401(k) plans, hidden fees can jump from 0.79% to 1.89%, or up to $920 per plan participant per year. This can mean paying an estimated $28,000 in hidden fees over the lifetime of their participation. If you selected one of these 401(k) for your employees, you could be unknowingly costing them $350 – $920 per year in hidden fees.

What are 401(k) Plan Fees and Who Pays for Them?

401(k) plan fees and expenses generally fall into three categories:

  • Plan Administration Fees – The day-to-day operation of a 401(k) plan involves expenses for basic administrative services – plan recordkeeping, accounting, legal and trustee services – that are necessary for administering the plan as a whole. Generally the more services provided, the higher the fees.
  • Investment Fees – the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Your net total return is your return after these fees have been deducted.
  • Individual Service Fees – Individual service fees are charged separately to the accounts of participants who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.We all evaluate our vendors occasionally. I find most doctors and small business owners do not evaluate their retirement plans because they do not know what questions to ask:

Questions

  • When was the last time you reviewed your retirement plan for cost savings or plan improvements?
  • Is it time to find out how to get a plan started?

Retirement

Assessment

Getting education from a physician focused fiduciary financial advisor is an important step in the process to either grow the profitability of your current plan or realize the benefits of a 401(k) Plan.

Conclusion

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One Response

  1. Dr. Carson, on June 11, 2014 at 10:25 AM said:

    More on Fees

    Guy – Of all those bank fees, convenience fees and other random charges we pay, the worst by far are the ones attached to 401k’s and other retirement accounts.

    While new disclosure rules went into effect in 2012, 401k fees are still poorly understood and often overlooked by workers. What’s more, the fees can seem deceptively small even though they have the potential to add up to hundreds of thousands of lost dollars.

    Consider this example from the U.S. Department of Labor:

    Assume that you are an employee with 35 years until retirement and a current 401k account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

    That adds up to $64,000 less to live on in your golden years, and that’s if your 401k has only $25,000 in it. Imagine how much you would stand to lose if you were more diligent about your retirement savings.

    Dr. Carson

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