It's true: Size counts, at least in retirement plans.
FeeX, a service that calculates the fees in retirement plans, has studied the average expenses in retirement plans of different sizes, and found that the bigger the plan, the lower the average expense ratio of its funds. (The company currently tracks fees associated with 401(k) plans used by more than 10 million Americans.)
The differences are striking: For very large plans, those with more than 100,000 participants, the average expense ratio among funds was just 0.27 percent. But for very small plans with fewer than 100 participants, the average expense ratio for the funds offered was more than three times as high at 0.87 percent.
Even funds in slightly larger plans, with 100 to 1,000 participants, had an average expense ratio of 0.70 percent. While anything below 1 percent is considered relatively low, that's a big difference between plans.
The employers with small plans "had good intentions in mind," said Yoav Zurel, CEO of FeeX. "But they don't have the time and resources to invest to find the best 401(k) plan for their employees."
Time and resources are just part of the problem for smaller plans. Their sponsors tend to have less bargaining power with fund companies and other service providers, so they are less able to negotiate on costs. In addition, there are certain unavoidable costs associated with creating and maintaining a plan, like legal and administrative costs, and a plan with fewer participants will have each of them picking up a larger share of the tab.
Employees in small retirement plans may face other retirement saving challenges too. For example, small employers are less likely to match contributions. In 2013, 65.4 percent of employers offering plans with between one and 49 participants made a matching contribution to those plans, but 90 percent of employers whose plans had more than 5,000 participants did so, according to the Plan Sponsor Council of America.
In addition, employees of small enterprises are less likely to be offered a retirement plan, period. Just 14 percent of employers with fewer than 100 employees even offered any type of retirement plan, according to Congressional testimony in 2013 by Government Accountability Office officials. Altogether, some 55 million private sector workers do not have access to a retirement plan at work, according to the AARP.
Luckily for employees faced with smaller, less attractive retirement plans, or none at all, there are other ways to save in addition to 401(k) plans and their ilk. Some 58 percent of respondents to a 2015 survey by the Transamerica Center for Retirement Studies said they are saving for retirement outside of work through individual retirement accounts (IRAs) or other accounts. (The maximum contribution to all tax-advantaged IRAs is $5,500 for 2015, or $6,500 if you're over 49 years old.)
In addition, a growing number of states are offering state-based retirement plans, automatic retirement plans for state residents who do not have access to a retirement plan at work. Oregon adopted such a plan in July, becoming the third state to do so, and other states are considering adopting a plan. Typically these plans would automatically enroll people without work-based plans, likely increasing the participation rate.
Saving for retirement is never easy. But at least those with the highest hurdles to clear are starting to have some options.