Remember the days when you could book a ticket on your favorite airline, check your bags, get the same coach seat as the next person and even board the plane at the same time all for one low price?
If you have flown recently, you realize those days are gone.
Today you can still book an inexpensive flight that will get you where you want or need to go. However, if you want to check your bag, you need to pay a fee. Want extra leg room, pay a fee.
Don’t want to be the last one to board your flight, pay another fee.
The change in airline industry fees a decade ago added some additional costs, but fares remain low today.
While you have probably altered a how you get ready to go to the airport these days, the airlines are still safely flying, and you and your fellow passengers still arrive at your destination of choice because of these changes.
Turning to 401(k) plans, retirement plan providers today face a similar challenge as the airlines did ten years ago. As a 401(k) plan participant your fares have decreased in the forms of lower investment expenses and core plan fees.
However, retirement providers must balance their own financial health with the fees they charge to deliver services to the many people and companies who have trusted them with their retirement savings.
Here’s a few examples of what retirement providers and employers are doing to keep core retirement plan fees low and what could come next.
Baggage Fees
As retirement providers competed for business over the last decade, they lowered pricing for their core services.
They also waived fees for things like taking a 401(k) loan or a plan distribution when you leave your company or retire. Like the airlines, they realize that any changes should keep the cost of core services or fares low.
Today, some 401(k) providers are introducing or increasing fees that don’t impact everyone all the time but will bring more revenue to their firm. One example is distribution fees. In some plans there was no cost to take a distribution from your 401(k) plan when you left your company.
As providers bid on new business or reprice current plans, we are now seeing increases in distribution fees to $75 or more.
Same for 401(k) loan initiation fees. While they might have been free or $25 in the past, those fees are also on the rise.
Sounds a lot like baggage check or priority boarding fees to me. It keeps overall plan costs competitive, but provides other opportunities to earn revenue.
Expensive Pizza
Remember the days when a 401(k) representative would come into your office and talk about your company’s retirement plan? My guess is you haven't seen them in a while.
There are a many reasons there aren't as many 401(k) reps running around your office, but the main driver is cost. Retirement plan providers used to include onsite employee meetings into their core pricing.
As fees continue to decline, margins have gotten squeezed and onsite education meetings is another service that have gone the way of the baggage fee, an extra charge.
And, they aren’t inexpensive.
In some cases providers charge over $2,000 a day to host onsite meetings. Many companies have replaced onsite meetings with plan changes like automatic enrollment to ensure employees join their plan.
Annual automatic increases in contributions to help people save more money towards retirement each year.
And, investing employees in target date funds as an appropriate strategy for their age if they have not made their own investment choices.
While they aren’t as warm and fuzzy as a conversation about 401(k) plans over a slice of pizza in your conference room, these methods have been wildly effective in helping more people start saving for their eventual retirement. Maybe change isn’t so bad.
Where Do We Go From Here?
The intense focus on investment and retirement plan fees means it won’t be business as usual for retirement service providers going forward. But remember, 401(k) Plans Are Not Free.
As service providers try to balance their financial health, the core services they deliver to the many and the reality that their costs are driven by the active few, more things will change.
It would not be shocking to see fees in the future for exchanging or trading investments in your 401(k) plan. The reality is very few 401(k) plan participants change the investments in their retirement plan.
The active few add costs for the many who set it and forget it.
With the broad availability and acceptance of web and app based tools, fewer people actually contact retirement call centers to get help with questions.
Will there be charges to speak with live operators or advisors in future?
Or, like the airlines, could we see more support and services available to those who want them and are willing to pay for them?
Coming back to the airlines, everyday people pay for the added comfort and services of a first class seat. They will even pay for an extra 4 inches of extra leg room provided with a “premier coach” seat.
Some change by retirement providers is overdue and beneficial.
Overall costs/fares are low. Despite a few added or increased fees for certain services, a good 401(k) plan, like a good airplane, should help all participants/passengers arrive safely at their retirement destination.
Now, in a sign of the times I am going to board my flight, stretch out in my extra leg room seat ($49), get comfy with my pillow and blanket ($7), and enjoy my snack box dinner ($10).
