401k Fees are Determined by HR Dept. Negotiation Skills

New York Life Insurance Company charges 401k fees of 0.83%. Meanwhile, Adobe Systems Incorporated, a smaller company, manages to get its employees a much better deal, charging fees of only 0.24%. That difference saves their employees an average of $39,600 over two decades [1]. What’s the difference between the two companies? The HR departments’ negotiation skills.

Adobe Systems has only 6,400 participants and around $600M in assets. With almost 12,000 participants who have collectively invested over $1.7B, New York Life Insurance’s HR department is definitely in a position to negotiate a better deal on fees for their employees. This is the case for many companies. For companies with more than 1,000 participants, it all comes down to H.R. Department negotiating skill, as illustrated in this chart [2]:

At FutureAdvisor, we consider an expense ratio of under 0.27% for all plan options to be both excellent and attainable. (That means a participant with $75,900 saved is paying only $200/year in fees.) Talk to your HR department if your average plan options expenses are greater than 0.27%, especially if your plan has more than 1,000 participants. You and your coworkers can get a better deal, saving yourselves tens of thousands of dollars.

Take action: Email your HR folks! (They might not even know it’s a problem.)

Your H.R. department is trying to do the right thing for you by setting up a 401k plan to help you save, but they might not even be aware of how high fees affect your bottom line. Bring it to their attention! If your H.R. department calls their broker to push for a better deal, with a little negotiating skill, they can save each employee tens of thousands of dollars. We wrote a sample email for you to make it easy!

Dear [your favorite HR department person],

I just read FutureAdvisor’s analysis of 401k fees and it looks like our company is in a good negotiating position to get our broker to reduce the fees we pay. Other companies of similar size have average plan option expense ratios of around 0.3% and ours is [ ]. You can also find our 401k page here: https://futureadvisor.com/401k

Would you be willing to call up our broker and do a little negotiating? You could save each person in the company tens of thousands of dollars.

Sincerely,
[you] [and your coworkers?]


[1] Savings of $39,600 over two decades was calculated by assuming starting balance of  $75,900 (the U.S. average), with a contribution of $15,000 each year for twenty years with inflation adjusted annual growth of 4%. Assuming the employee invests across all plan options, which is a behavior we’ve seen from working with many clients, the difference in an expense ratio of 0.83% and 0.24% means that the end balance for the accounts are $518,227  and $557,859, respectively.

[2] The chart shows 312 companies with fewer than 40,000 participants in their 401k plan for which FutureAdvisor has full plan option support. As the dots get higher and redder, participants pay more in fees – we’ve assumed that accounts have a $75,900 balance to calculate the fees. The larger dots are plans with more plan assets. Hover to see company name, number of participants, plan assets, and average expense ratio.

Note: Avery Dennison Corporation appeared to charge average 401k plan option fees of 1.21% initially. But upon closer inspection, one fixed income fund with an erroneous expense ratio was driving the high rate, which is actually 0.53%. Furthermore, a correctly allocated portfolio according to FutureAdvisor’s methodology can be chosen among the fund options with a 0.43% expense ratio.

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