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.