Could fiduciary advice cut 401(k) plan costs for small businesses?

The DOL’s push to impose a fiduciary level of care in retirement plans could be a financial benefit overall for small businesses with 401(k) plans, according to a new report.

Employee Fiduciary, a provider of low-cost 401(k) plans, has published a study indicating that fiduciary-grade investment advice can significantly reduce the costs of small business 401(k) plans.

The study, which analyzed fees from 1,109 fiduciary-grade financial advisors, comes just as the DOL’s fiduciary rule, approved in April, faces challenges in the courts and in Congress.

The new rule, effective September 23, 2024, expands the circumstances in which financial professionals must act as fiduciaries, requiring them to prioritize the interests of retirement investors.

“Our study demonstrates that fiduciary-grade investment advice lowers the total cost of 401(k) plans, resulting in higher returns for participants and more savings to compound until retirement," Eric Droblyen, president and CEO of Employee Fiduciary, said in a statement.

The report’s findings point to a trend where fiduciary-grade financial advisors’ fees decreased as plan assets increase. For smaller plans with assets between zero and $500,000, the average fee was 0.69 percent. Mid-sized plans, holding $500,000 to $1 million in assets, faced an average fee of 0.64 percent, while larger plans, with assets between $1 million and $5 million, saw fees drop to 0.47 percent.

When combining advisor fees with Employee Fiduciary's plan administration fees, total plan costs were found to be lower than national averages. For example, plans with average assets of $189,367 incurred total fees of 1.63 percent, compared to the national average of 1.71 percent for plans with $500,000 in assets.

By working with advisors who apply a fiduciary standard recommend investments that have reasonable fees, small businesses can help improve retirement outcomes for the workers in their 401(k) plans, the study found.

"When 401(k) fees are deducted from participant accounts, they reduce returns dollar-for-dollar, leading to less savings to compound until retirement," Droblyen said.

"The Retirement Security Rule should blunt these losses by subjecting all retirement advice to ERISA's rigorous fiduciary standards," he said.