LAST REVIEWED Jan 04 2021 12 MIN READ
By Damian Davila
Cooperatives are institutions that are co-owned and operated by their members for mutual benefit. The most well-known type of cooperative is a credit union, a financial cooperative that offers products and services similar to those of banks but at better rates. For example, in September 2018, credit unions had a national average rate of 4.78 percent for a 5-year home equity loan, while banks had a 5.24 percent average rate for the same loan.
It has been estimated that there are over 29,000 cooperatives across the U.S., ranging from formal professional organizations (cooperatives of dentists, accountants, landscaping companies, and many more) to casual networking groups for those in similar industries. Cooperative membership is particularly attractive to small businesses, who may not have the buying power or employee count to compete in various ways with much larger big box stores or corporations, and both small business owners and employees will find a lot of financial, informational, and personal benefit to meeting regularly with their cooperative members.
We wrote this guide to help cooperative members, owners, and staff learn about the various ways employee retirement benefits can be used as an asset, as one of the many benefits of cooperative membership, but also as a tax benefit for employers and employees alike.
How are cooperatives able to get better pricing on goods and services for their members?
Cooperatives pool together a growing network of independent members to access better pricing of all types of goods and services and improved marketing business techniques that would be out of reach to most members on their own. Member-owned cooperatives aim to level the playing field with large corporations, big box stores, and online providers. A cooperative’s goal is to have equal sales and bargaining and purchasing power to that of corporate or online competitors. Depending on the industry, “goods and services” may include acces to software licenses, store inventory, wholesale goods, office supplies, etc.!
Vendors that work with small businesses, like Human Interest, are incentivized to offer bulk discounts to cooperative members because they can offer their services, training, and shared learnings to a group of clients that are fairly similar, which makes it possible for them to offer lower pricing via this distribution channel (vs. having cooperative members individually and separately seeking out their services).
Is there a fee to become part of a cooperative?
Typically, yes, because you become a co-owner of the cooperative. However it, tends to vary quite a bit, so be sure to ask the specific cooperative you’re interested in about this directly. One of the key characteristics of a cooperative is that it is focused on the financial wellbeing of its members rather than on the chase of exuberant profits. As part of keeping a sustainable operation, a cooperative generally charges a one-time joining fee and/or retains a small percentage of the rebate/discount available to members.
How can a cooperative help its members with a 401(k) plan?
The fact is that most 401(k) plans are loaded with many fees. About seven in ten 401(k) plan holders aren’t aware that they pay fees to their plan administrator and six of in ten aren’t aware of how much they pay in fees. When left unchecked, those fees can severely handicap your ability to reach your target retirement savings goal.
This is where cooperatives come in to help its members with a 401(k) plan, similar to how they may be able to help with other financial servies or insurance: a cooperative can leverage its broad member base to negotiate very competitive administration and investment plan fees. Since cooperatives act in the best interest of their members, plan fees are fully disclosed at all times so that members always have a clear picture of what they’re paying under the 401(k) plan.
You can imagine that a much larger company, with hundreds or thousands of employees and millions of assets in the company’s collective retirement plan, has a lot more bargaining power with financial institutions when it comes to negotiating down the fees that the employer and employees have to pay for plan administration. As a cooperative member, you probably aren’t planning on reaching 1,000 employees anytime soon, but you don’t want to be unduly charged really high fees — by having the cooperative negotiate a larger deal for all of their members on your behalf, the total count of all of the employees at all of the cooperative member instiuttions can be competitive with larger corporations, and you’ll get more attention and certainly more bargaining power than you could on your own.
What is the impact of fees on my 401(k)?
Let’s assume that you have a 401(k) with a current balance of $100,000 and that you are 30 years away from retirement. Here are three investment scenarios in a fund with an annual 6% rate of return and various annual expense ratios (the automatic fee you pay on your investments). Expense ratios are also called “fund fees” and they are typically the most egregious when it comes to 401(k)-related fees, so we’ll be focusing on this type of fee first.
Annual 401(k) fee (expense ratio)
Balance After 30 years
Difference from 0% scenario
In this example, a 0.25 percent annual expense ratio means that you pay $250 in 401(k) fees for a balance of $100,000 every year. While $250 per year may sound ok, it really adds up over a long period of time (a whopping $41,450 over 30 years in this example!).
But an annual expense ratio is just the beginning. Depending on the size of assets in your 401(k), the number of plan participants, and set of applicable plan rules, you may have to cover additional charges, such as record-keeping fees, 12-1b fees, and advisory service charges. When starting to stack up those fees, some plan holders could pay up to 2.0 percent in annual fees!
What are the ways that a cooperative can negotiate lower 401(k) fees?
Here are the ways in which cooperatives can work to lower your 401(k) fees.
1. Seeking transparent pricing
Everybody, even 401(k) plan managers, has to make a living. Charging fees is necessary but plans shouldn’t hide any fees in the fine print. A cooperative can make it a requirement for a plan administrator to disclose all fees upfront because it represents a large pool of potential customers.
For example, Human Interest provides a clear pricing breakdown:
Employers: $120 base price per month + $4 per employee per month + $499 one-time setup fee
Employees: 0.50 percent of account balance per year + 0.07 percent average fund fees
Compared to 1.89 percent average for small 401(k) plans, Human Interest’s pricing is quite competitive. With transparent pricing, you’ll have better control over your nest egg and have a better understanding of what’s happening with your retirement savings.
2. Choosing plans with low-cost equity index funds
Most 401(k)’s offer target-date funds as the default option for investing contributions from plan holders. According to the Employee Benefit Research Institute (EBRI), more than 70 percent of 401(k) offer target-date funds and 48 percent of 401(k) participants hold this type of funds. Despite their convenience, the majority of target-date funds charge high fees and have highly variable historical returns.
On the other hand, equity index funds are well-known for their low investment fees because these funds are passively managed. By choosing passively managed funds, you also get better returns. Only 20 to 35 percent of actively managed funds beat the benchmark for their category. Additionally, trying to time the market costs investors between 1.5 and 4.3 percent every year.
3. Seeking portfolio rebalancing and investment advising services
Cooperatives can advocate for you in receiving plan features that usually come with an additional price, for free. One key feature to look for is automatic rebalancing. In a nutshell, automatic rebalancing matches you again with your pre-selected portfolio allocations after a certain period of time. This process has many advantages, including minimizing investment fees and maintaining your target risk exposure.
Here’s a full review of what exactly automatic rebalancing is.
Additional investment advising services are always a nice-to-have because every plan holder has different financial needs and goals. If a plan can include financial advisors or even 401(k) robo-advisors (wealth management based on algorithms and your answers to questionnaires) at no or very low cost, then you’ll be able to make better, more informed decisions regarding your 401(k).
If you’re a member or administrator of a cooperative and want to set up or switch to a 401(k) that’s great for employees and employers, let your company know about Human Interest.
Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.