Comparing Retirement Plans
This week I've been working on a simple way to view the differences in retirement plan options. So here we see a comparison of various 401(k) plans to SIMPLE and IRA options. *Note: I have compared the most commonly used plans here, and again, retirement plans are not limited to these options.
If you'd like to view the document in PDF format, click below.
Sometimes business owners, benefit coordinators, and office managers tell me “Our investment advice is free.” Unfortunately, they don’t understand how expense ratios and advisor fees work.
For the sake of brevity, I’m going to discuss the share classes in mutual funds and ETFs, which are the core of most 401(k) plans today.
So, what exactly are share classes? And how do they effect your bottom line?
To put it simply, the share classes in a mutual fund are just a way for brokers, advisors, and clearing houses to hide their fees. Let’s look at just how many share classes one mutual fund can have:
Yep- that’s the exact same mutual fund with 17 different share classes!
From this list, you can see that the R6 and F3 share class have the lowest gross expense ratios. You can also see a direct correlation between lower expense ratio and higher returns.
So why are there so many different share classes? Because there are fees added to each class that pay the mutual fund company, marketers, brokers, and advisors who charge commission. Further, the difference between A, B, and C shares of mutual funds are simply when the commission is paid to the advisor or broker.
We see that an R6 share class would be most beneficial in a 401(k) plan as the 529 classes are only permissible in 529 plans. The R6 is almost half the cost of your standard A share, yet most business owners and managers don’t know they exist, and certainly don’t demand them from their plan advisor.
When I sit down with a plan administrator and explain this they commonly reply, “well why hasn’t my current plan advisor offered these more cost-efficient share classes?”. Honestly, because that’s how your advisor is getting paid.
If you don’t see R shares in your 401(k) or other retirement plan, it’s time to review your plan. To find out how much money has been leaking from your retirement by something as simple as a share class- and how to reverse that leakage, contact us today.
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