An inside look into Principal Financial Group 401(k)

As a 401(k) provider, how does Principal Financial Group fare? Is it advisable to get a 401(k) plan from them? Find out more here

Contents

What is a 401(k) plan?
Overview of Principal Financial Group
Enrolling in a Principal 401(k) plan
Is the Principal Financial Group 401(k) worth it?
Assessing the Principal 401(k) Plan

The 401(k) plan is the favored retirement savings vehicle for many American workers with $6.9 trillion in assets in over 710,000 401(k)plans as of September 2023. As of this writing, there are about 70 million active plan holders and millions more former employees and retirees living on a 401(k) plan.

There are hundreds if not thousands of 401(k) retirement plan providers in the US, and one of them is Principal Financial Group.

InvestmentNews looks into Principal Financial Group. As we focus on this financial institution, we answer questions like:

is Principal a good 401(k) provider?
how does the Principal Group 401(k) work?
what are the Principal Financial Group’s terms of withdrawal?

In this article, we hope to provide the answers that investors are looking for so they can make informed decisions.

What is a 401(k) plan?

A 401(k) plan is an employer-sponsored retirement savings plan. This is often part of the benefits package employers offer to build a reliable workforce that will remain loyal and stay for the long term.

A 401(k0 plan works by taking a percentage of employees’ salaries and placing it in investments. These can be a mix of mutual funds, target-date funds, and index funds.

Just recently, some 401(k) providers began to offer cryptocurrency as part of the plan’s investment portfolio. This type of new investment for 401(k)s has been met with apprehension.

What makes the 401(k) so attractive to investors and employees are these benefits:

the employer match – employers can choose to contribute an equal or partial amount of their employees’ contributions to their 401(k). This is what many investors call “free money”

tax benefits – employees’ contributions to the plan are tax-deductible, enabling them to reduce their gross income and lower their income taxes for the year. Plus, withdrawals on a 401(k) plan are taxed as ordinary income and there’s a way to avoid taxes and penalties should an investor make an early withdrawal.

There are other compelling reasons to choose a 401(k) as a retirement savings tool. Read our article on why the 401(k) plan is the best investment option for employees for more.

Overview of Principal Financial Group

Principal Financial Group was established in 1998. It is a wholly owned subsidiary of Principal Investors Holding Company. In the first quarter of 2016, Principal Financial Group reached nearly a trillion in assets held in their 401(k)s. That’s about 20% of the entire $4.8 trillion held in 401(k) plans in the US. This means that one in five Americans has a 401(k) handled by Principal Financial Group.

Principal has touted its 401(k) plan as excellent, and many investors believe that they are making decent returns in their 401(k) plans with them.

Enrolling in a Principal 401(k) plan

Signing up for a 401(k) plan with Principal is a straightforward process. All investors need to do is go to principal.com and follow the steps:

Step 1. Find the Create an Account button.

Step 2. Fill in your personal details, then accept the terms and conditions.

Step 3. Provide some personal questions to verify your identity.

Step 4. Choose a username and password and provide an email to link to your account.

Step 5. Choose questions that customer service can use to verify your identity. This is an important security step.

Step 6. Wait for the confirmation email and verify your account. You can log in from then on.

You can check a more detailed guide on how to put up a 401(k) with Principal.

What are the average fees for a Principal 401(k) plan?

In a recent study conducted to compare 401(k) fees across the industry, it was found that Principal Financial Group charged small businesses around 1.23% of their plan assets annually. Here are some statistics on Principal Financial Group:

Average Fees of Principal Financial Group

Average Plan Assets Handled	$2,194,007.59
Average Number of Plan Participants	36
Yearly Administration Fees (per participant)	$455.94
All-In Fees	1.23%

Is the Principal Financial Group 401(k) worth it?

Given the information on Principal Financial Group, is it advisable for employers or individual investors to choose them as their 401(k) provider? To know the answer, determining their all-in fees for your plan is crucial.

Knowing this amount and expressing it as a percentage of your assets for your 401(k) plan with Principal Financial Group can help you decide whether to stay on, renegotiate the fees, or find a new provider.

So, here’s how to figure out how much you’re paying for in fees with Principal:

Step 1. Download the excel template

This template will help you compute the direct and indirect fees that Principal is charging. Be sure to fill in each of the cells with the appropriate information, such as each fund’s name, its current balance, its expense ratio, etc.

Step 2. Gather the important documents

In Principal’s case, you will likely only need one document from them: the Retirement Plan Fee Summary. According to the US Department of Labor, Principal is legally obligated to supply their employer clients with a 408(b)(2) Fee Disclosure.

This document should contain Principal’s pricing scheme and plan-level data on their direct fees and asset-based fees. You can find this on the Principal website, under employers. You must be logged in to your account to access the information.

Step 3. Find Principal’s Direct Fees

You can find Principal’s Direct Fees on page 3 of their “Retirement Plan Fee Summary”. It will be listed as a dollar amount.

Step 4. Find Principal’s Indirect Fees

Principal charges 85% of its fees via indirect fees embedded in fund expenses. Their indirect fees are subdivided into two types:

Revenue-Sharing Fees: these are non-investment related fees to the operating expenses of a mutual fund. The downside of fees like this is that they reduce the investment returns of plan participants. There are two types:

12b-1 fees – pays for a broker or insurance agent
Sub-Transfer Agency (sub-TA) fees – pays for a recordkeeper

Wrap Fees: this is a fee that applies to variable annuities, which are 401(k) investments used instead of mutual funds. Variable annuities are mutual funds “wrapped” in a layer of insurance along with additional fees and redemption restrictions. These fees have the downside of increasing the expense ratio of the underlying mutual fund, sometimes by as much as 1% or more.

You can find the revenue sharing and wrap fees in sections of the 408(b)(2) document. Revenue sharing fees can be found in the “Investment Options” section of the 408(b)(2). Meanwhile, wrap fees can be found in “Annual Fees Calculated as a Percentage of Plan Assets” section in the same document.

To calculate the indirect fees, simply multiply the revenue sharing and wrap fees percentages with their corresponding fund balances.

Step 5. Figure out the All-In Fee

Enter the fund information from your Principal 408(b)(2) document into the spreadsheet. The formulae should automatically calculate your indirect fees.

Next, enter Principal’s direct fees. By now your administration fees and investment expenses (net of indirect fees) should be totaled, giving you the all-in fee of your Principal 401(k) plan. To make it easier to compare Principal’s fees against other plans, express this number as a percentage of plan assets.

Assessing the Principal 401(k) Plan

After figuring out the all-in fees of your Principal 401(k) plan, how do you know now whether it’s the right plan for you? This is not a question with a quick answer. To know for sure, keep Principal’s all-in fees in mind, then consider these factors:

401(k) plan sizes
average 401(k) plan fees
average returns on 401(k) plans
average employer match to 401(k) plans
average 401(k) administration fees

401(k) plan sizes

This refers to the aggregate assets within a specific 401(k) plan. In most cases, the plan size influences the amounts and types of fees. It’s important to remember:

small-sized plans have less than $10 million in assets
medium-sized plans range from $10 million to $100 million
large-sized plans handle assets over $100 million

Plan size can greatly impact the fees due to the economies of scale in financial services. Also, plan sizes and fees are inversely proportional, as larger plans can negotiate lower fees, since they have more assets for the plan provider to manage. As for smaller plans, they can have higher average fees as a percentage of plan assets.

Average 401(k) plan fees

There are 3 plan fees, depending on the amount held in assets. The higher the assets, the smaller the fees:

Small-sized plans

Fees for small-sized 401(k) plans with less than $10 million in assets can be proportionally higher than their larger counterparts. This is often due to the fixed costs of administering a 401(k) plan, which represent a higher percentage of smaller plan assets.

These fees can range widely based on the specific services included in the plan, but the average total plan cost is often between 1.5% and 2% of plan assets, charged yearly.

Medium-sized plans

Thanks to their larger asset base, medium-sized 401(k) plans with assets of between $10 million and $100 million can get lower fee rates.

The average total plan cost for medium-sized plans often ranges from a yearly fee of 1% to 1.5% of plan assets. The fee structure and investment options chosen by the plan administrator significantly influence this variation.

Large-sized plans

As for large-sized 401(k) plans with assets exceeding $100 million, they can benefit from economies of scale, which allow them to get lower fee rates.

These plans can often negotiate their annual fees to less than 1% of plan assets. At this size, it’s not unusual for some large plans to get fees down to as low as 0.5% of plan assets.

Average fees for 401(k) plans according to size

Plan Size	Small-Sized Plans	Medium-Sized Plans	Large-Sized Plans
Average Fee	1.5% to 2% annually	1% to 1.5% annually	As low as 0.5% of plan assets

Average returns on 401(k) plans

Depending on market conditions and the economic environment, average 401(k) plan returns can range from 5% to 8%. But because the returns on a 401(k) plan are based on the success of the investment portfolio, it’s possible to see much higher or lower returns depending on the plan investments and overall market performance.

Average employer 401(k) match

On average, most employers give a match equal to 4.7% of their employees’ salaries, but there can be other matching systems. Some employers may contribute $0.5 for every dollar an employee contributes to their 401(k). Others may give $0.50 for every dollar, only up to 6% of their employees’ salary. In other setups, the employer may match up to half their employees’ contributions on up to 6% of their salaries.

So, if an employee contributes up to 6% of their salary to their 401(k), the employer will contribute an additional 3%.

Average 401(k) administration fees

For a financial services provider to manage a 401(k) plan, they must incur expenses for administrative services like recordkeeping and legal support. Other necessary services like customer support, educational seminars, and investment advice may also mean costs.

These expenses can be covered by investment fees or directly charged to the plan, either proportionally to your account balance or as a flat fee per participant. In general, the more services used, the higher the fees.

Administration fees charged by a 401(k) plan advisor can vary widely, going for as little as 0.05% of the total assets, while others may charge 7% or more. As a rule, the more assets being overseen and the more participants, the smaller the percentage taken as a fee.

For investors, maximizing the returns, employer match and contributions while minimizing fees is more important in 2024, since there are a few new features introduced to the plan.

For starters, SECURE Act 2.0 increases the contribution limits to $24,000 and has employer matching for student loan payments! Watch the video to know more important changes to the 401(k):

Is Principal Financial Group’s 401(k) plan right for you?

After taking Principal’s all-in fee into account along with industry averages for fees on plan sizes, fees on plan administration, and other factors, it’s easier to decide on their 401(k).

If you find that your returns with Principal are lower than the average while your fees are higher, talk to your employer. Make your case for: