The Benefits of Simplification
Ever wonder why 401(k) plans cost so much to run when you can open an IRA directly at a custodian and automate contributions for minimal, if any, costs? Lack of technology originally drove much of the expenses in 401(k) plans that we still see today. While technology has dramatically improved, those who could cut (or in some cases eliminate) costs such as custodial and recordkeeping fees have no incentive to do so. If everyone charges about 1% all in fees, that becomes the gauge for reasonableness, even when there's no good reason to tie fees to asset levels.
Take, for example, a merchant in northeast Wisconsin. In 2021, this plan paid over $30,000 in fees from its trust when the total plan contributions were only $20,000 ($8,000 match, $12,000 deferrals). Even though workers got a nice matching contribution, it was wiped out by the plan costs to such an extent that for every dollar saved, they still lost $1.50 to fees. When you have a plan this inefficient by design, the only people benefiting are the providers since the same dollar saved in an IRA would yield a full dollar saved. This certainly raises questions as to the fiduciary processes that yield losses at this great a scale.
Fortunately, employers have options other than 401(k) plans that can stop the fee leakage and help employees realize real savings. Through a SIMPLE IRA plan employers can offer many of the features workers really want from a plan (matching contributions, investment freedom, personalized financial advice) without the big sticker price and time commitment that a 401(k) brings. Employers can cut out the excess expenses associated with 401(k) plans, along with the headaches and fiduciary responsibilities and instead focus on running their business instead of running their 401(k) plan. To top it off, employers in states mandating workplace retirement plans, the SIMPLE IRA should satisfy that requirement for you and qualifies for the same tax credits as 401(k) plans.
The catch? There are some drawbacks with a SIMPLE IRA. They are exclusively for employers with fewer than 100 workers so bigger firms don't qualify. The design is streamlined, so you won't have the ability to tinker with eligibility, vesting, or other features. The contribution limit for employee deposits is only $15,500 in 2023, with a catch-up of $3,500 for workers over age 50, which is materially lower than 401(k) limits. Most small business workers; however, don't come close to these limits and the owners who may be in a better position to "max out" will often better off opening a supplemental taxable brokerage for the extra investments than paying the excessive fees for the luxury of higher contribution limits.
While the 401(k) certainly has benefits for certain employers, it's over utilized and needlessly funneling American's hard earned savings into the hands of financial service providers. Click below to download materials showing how our innovative SIMPLE IRA+ service could save you time and money.