This is the first article in a two-part series on small business retirement. Here, we look at the higher fees business owners and their employees can expect to pay. In the second article, we discuss how to mitigate them.
SOCKING AWAY RETIREMENT funds is becoming more expensive for small-business owners and employees.
When the stock market plunged roughly 40% last year, retirement plan assets also took a dive. In 2008, assets held within retirement plans lost 22% of their value, falling to $14 trillion, according a recent report on from the Investment Company Institute (ICI), an industry trade group in Washington, D.C. At the same time, defined contribution plan assets lost 22% of their worth, while individual retirement account assets declined by 24%, the ICI said.
Compounding the blow to retirement savings, the decline in plan assets is spurring higher management fees and greater expenses at some mutual fund companies and 401(k) providers. And although such changes will likely affect employer-sponsored plans across the board, small plans, which often have fewer employees and fewer assets, may get hit the hardest.
“If a plan that was worth $1 million dropped to $600,000, you aren’t going to be able to negotiate as good a deal,” says Bert P. Kingsley, a Hartford, Conn.,-based principal at Mercer, a health and benefits consultancy. Conversely, “larger employers have generally negotiated much lower set costs and record fees,” Kingsley says.
Broadly, small companies have always had less negotiation clout than big businesses. And though today’s situation appears bleak, knowing what’s on the horizon can help business owners adjust or reconsider their retirement offerings to cut costs.
Here’s a look at several common changes to retirement plans and how they might affect small businesses:
Mutual fund fees and expenses
In the last year, fees in most mutual fund categories rose, according to research that Morningstar prepared for CBS MoneyWatch.com. For example, the average fee for an international equity fund rose to 1.56% from 1.48%, while stock fund fees jumped roughly 5% on average.
The reason for the hike? “A number of funds have taken substantial hits to their asset levels,” says Andy Gogerty, a senior fund analyst at Morningstar. And since mutual fund companies generate revenue by charging fees on assets under management, as their assets have dwindled, so too have their profits. To make up for lost revenues, some fund companies are boosting their fees. (Here’s our story on rising mutual fund fees.)
These fee hikes typically won’t affect larger employers because they often pay a lower, institutional price on their underlying investments. But for smaller firms that buy retail might be hit, Kingsley says. “You have to go back and renegotiate your contract to get that waived,” he says. “But if the profitability isn’t there, they’ll invoke those charges on smaller plans.”
Another downside to managing fewer assets: static expenses, such as marketing, investment advisory fees and distribution expenses cover less ground, Gogerty says. As a result, the remaining investors must carry more of the burden, he says.