Dentaltown November 2020 - 76

continuing
education

A well-run 401(k) is a powerful
retention tool-one that allows
the owner/operator a chance to
share in profits while inducing
employees to think long-term about
their career path in the company.
Learning objectives

High fees

Upon reading this article, participants
should be able to:
1. Understand the impact of high
fees, which fees are reasonable
and the effect of compounding.
2. Recognize the advantages and
disadvantages of different
investment vehicles.
3. Understand the meaning of the term
fiduciary and recognize who acts as
the fiduciary on a 401(k) plan.
4. Understand the risks that practice
owners face when acting as the
fiduciary on their own 401(k) plan.

Many legacy 401(k) plans charge often
obscured fees of up to 5% of the assets under
management annually. Many modern plans,
however, charge far less-costing 1% or less
annually. Open, transparent, asset-based
fees in 401(k) plans provide peace of mind
and security from hidden costs common in
legacy plans. Such hidden fees are increasingly
prevalent and tend to ride along as obscured
fund costs, fees nested inside investment
vehicles and tacked-on service fees to pay
for employee benefits such as education and
required plan reporting services.
Fees are subtracted from the entire account
balance, not from any gains you might make.
You pay fees even if the market declines, and
that missing money has an outsized effect on
portfolio growth over time. Money should
be compounding for the investor by growing
faster over time as gains are reinvested. Yet,
money removed in the form of fees forever
ceases to grow for the investor and instead
compounds elsewhere, to the benefit of the
company offering the plan and fund managers
running those actively managed products.
Ultimately, one-third and up to one-half of
the return an investor might have expected
from a typical multidecade investment process
is lost to unnecessarily high fees.

Importance of 401(k) plans
401(k) plans provide a great tax incentive
to save money and invest for retirement.
They also provide an attractive benefit for
recruiting staff members in a competitive
labor market. A well-run 401(k) is a powerful
retention tool as well-one that allows the
owner/operator a chance to share in profits
while inducing employees to think long-term
about their career path in the company.
Likewise, high-income owners stand to
benefit from the tools found in 401(k)
plans, such as tax-deferred profit sharing
and deductibility of employer contributions.

Investment vehicles
There are two common products available for 401(k)s: actively managed funds
and index funds. Actively managed funds
tend to be sold through brokers who invest
your employees' savings in stocks and shares
they choose. Those same brokers often
are incentivized to maximize their own
commissions and fees. Those commissions
add up, to the detriment of performance.
Actively managed funds in 401(k) plans
thus are significantly more expensive than
index funds.
Index funds are inexpensive by design.
Instead of trading costly mutual funds, they
hold a basket of stocks and shares and only
buy or sell on occasion to stay on track with
a target market index, such as the S&P 500.
Index funds and their low-cost cousins,
exchange-traded funds, follow preset rules
to faithfully re-create the return of their
underlying investments.
Research has shown that index funds
provide returns greater than actively managed
funds more than 90% of the time.1 When
the increased trading costs and associated
friction of an actively managed fund are
taken into account, this figure is even higher
than 90%.

What is a fiduciary
and why do I need one?
Having a fiduciary relationship with your
401(k) plan is not the industry standard, but
it should be. A fiduciary on your side brings
an important quality to your investment
decision process that will protect you as the
owner/operator and as a participant in the
plan. A fiduciary who manages your 401(k)
is required by law to put the clients' and
employer's interests ahead of his or her own.
Fiduciaries are different from stockbrokers,
who often are motivated by commissions
they might earn and who typically put their
own interests first.

Disclosure:
The author declares that in the past 12 months, he has had a financial interest,
arrangement or affiliation within the field of dentistry or health care with Rebalance.

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