We recommend that both small business owners and employees take an interest in this
article. We’ll uncover a potential way to save hundreds, if not thousands of dollars over
the course of your remaining work life!
As fee-only financial advisors, we think that there is one expense that often gets
overlooked: retirement plan expenses. Not only can this affect your bottom line, it can
have a significant impact on all the participants’ nest eggs for the future.
For owners of small businesses with employees, there are three plans most commonly
used. These are SEP-IRA plans, SIMPLE IRA plans and 401(K) plans. Comparison of
the various plan features is beyond the scope of this article. The most critical issues to
be aware of regardless of which plan you choose, are the following:
(1)What are the administrative fees involved?
(2)What are the management fees for the funds offered by the investment company?
(3) What is the quality of the funds in which participants can invest?
Often times, 401(K) plans we have seen include asset fees, whereby a percentage of
each participant’s assets is charged as an administrative fee, typically on a monthly
basis. Even a very small percentage charged can reduce the long term growth,
substantially. Since these fees are taken directly out of each participant’s account,
employers and employees are often totally unaware of the fact that the fees exist and of
the negative impact they can have. What’s worse, is the fact that as the account grows
in value, the fees get bigger and bigger. There are plans available that do not charge
asset fees.
Secondly, you should ask: What are the management fees being charged for the funds
offered for investment? These will be outlined in the plan prospectus. Average mutual
fund fees are about 1.3%, annually. Fees will vary with the type of mutual fund. If the
fees for the plan you have or are considering don’t average around 1% or less, we
suggest you look elsewhere. Plans offered by insurance companies often include funds
with high management fees. Fund management fees can significantly impact your long-
term total return.
Finally, you need to check on the quality and type of the funds offered by the plan. At a
minimum, check the Morningstar® ratings of the offered funds. The vast majority should
be three stars or better and there should be very few that are unrated (meaning they
are new funds). While the Morningstar® rating is no guarantee that all the funds will
perform well, considering it is better than taking the salesman’s word about the quality of
the funds. Also, be sure that the plan offers a good variety of investments. Quite often
our clients have very little to choose from outside of several large domestic stock funds,
a money market fund, an international fund and maybe a few bond funds. Without a
decent variety of investments to choose from, it can be difficult to construct a well-
diversified portfolio.
If you’re still uneasy about whether a plan is good for you and your company, seek
professional-unbiased help from an independent financial advisor. And if you are an
employee yourself and don’t own a business, you might want to talk to your employer if
your company’s retirement plan doesn’t stack up well based on the above guidelines.
David C. Patterson, CFP® and Erin Patterson-Preston, CFP® are the owners of
Patterson Advisors, LLC, a fee-for-service-only financial advisory firm. Patterson
Advisors, LLC is a Registered Investment Advisor, registered with the State of Michigan,
helping clients in Waterford, Clarkston and Royal Oak, Michigan as well as other
Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, August, 2008
Don't Ignore Retirement Plan Expenses
By David Patterson and Erin Preston (formerly Patterson)