At the start of 2020, Congress made it easier for small businesses to offer 401(k) retirement plans to their employees.

That’s a relief. Participation in 401(k) plans is far too low. Just 60% of workers have access to a 401(k). Even then, only 42% of workers participate.

The law, known as the SECURE Act, is expected to make it cheaper for small companies to start plans by allowing employers in the same geographic area to pool participants. The act also raises the tax credit for starting a plan up to $5,000 from a previous cap of $500 and includes a $500 per worker credit for using automatic enrollment. 

What Congress did not do was anything to lower the cost of actually investing.

The biggest companies in the country enjoy already low investment costs. A study conducted by Brighstcope found that companies with millions in employee assets tended to get individual investment fees below 1%.

Those with fewer total dollars in the plan, which is most small companies, got stuck paying 2% or 3% or worse.

Behind those high costs is a perfect storm of conflicts of interest: For instance, plan providers get a percentage of fund fees collected from participants, so they’re incentivized to promote high-cost investments. 

Business owners don’t feel that cost at first; it’s passed on to their employees. Yet if owners participate they end up paying even more. Owners typically have the most money invested in their own plan. 

Few business owners understand the true impact of those costs. And that’s leaving aside the legal risk owners take on by sponsoring a plan, often without realizing it.

Nevertheless, cost is coming down thanks to newer, more modern 401(k) plans designed to work for small firms with, say, just a dozen employees.


Part of the cost savings in these modern plans comes from using low-cost index funds, rather than forcing employees into a menu of costly, conflict-filled funds.

Instead, modern 401(k)s shop independently for index-style funds that cost a tiny fraction compared to proprietary funds.

Costs are a big deal. Research shows that expensive funds rarely do as well as simply tracking the index, largely because those high fees come out of the pockets of savers before investment growth can occur.

Over a typical career, retirement investors in costly funds can see one-third and up to half of their investment return absorbed by the combined fees of their plans — from plan providers, recordkeepers and from the underlying funds themselves. 

It is a good thing that the federal government and the states are working to drive down the cost of small business retirement planning. Pooled plans should, eventually, open the door to lower-cost retirement investing for millions of Americans.

Yet the market already has begun to shift toward lower-cost providers that offer conflict-free, fiduciary plans at a fraction of the cost of legacy plan providers. Congress is moving in the right direction regarding Americans’ retirements, but modern 401(k) providers are a step ahead. 

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