The Hidden Cost of Insurance-Wrapped 401(k) Plans
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Investment Overview
Traditional 401(k) plans generally offer mutual funds, target date funds, and cash alternatives.
An insurance wrapped 401(k) replaces or supplements these choices by bundling investments, administration, and recordkeeping into an insurance contract, using insurance products such as sub-accounts, annuities, and stable value or other insurance-backed guaranteed options.
Insurance-wrapped plans can limit access to the broad investment universe. Without open architecture, participants are confined to an insurer-controlled menu instead of the universe of 25,000+ available funds in the marketplace, resulting in a more limited and potentially conflicted investment lineup.
Did you know?
Major insurance providers¹1 have been successfully sued by their own employees for filling retirement plans with high-cost, proprietary investment options—at employees’ expense.
If these companies failed to act in the
best interests of their own workforce, what confidence should you have that they will act in the best interests of yours?
The Problem
Insurance is designed for protection while retirement plans are designed for long-term risk-appropriate growth. Hiring an insurer to oversee your retirement plan is like relying on your brakes to get you to your destination— essential for safety, but unable to deliver enough forward momentum.
While this structure may provide guarantees and slightly higher returns on cash type products, it can involve lower long-term growth, higher overall costs, and less transparency. As a result, this structure may result in:
- Conflicted incentives: providers may have an incentive to steer participants toward insurance or cash-type products—where they earn more—rather than investments that may be better for participants.
- Low long-term growth: overly conservative, cash-heavy allocations regardless of participant age or goals.
- High costs and inflexibility: layered fees, surrender charges, and penalties.
- Limited transparency: fees embedded in products and higher expense funds that aren’t easily identifiable as they lack basic reporting and ticker symbols.
Why it Matters
These structures can result in unreasonable expenses, low real-world returns, and frustrating service experiences that materially undermine employees’ ability to retire successfully. Small inefficiencies compound into significant losses over decades. Over the past 20 years, a diversified portfolio has generated more than twice the earnings of a cash-equivalent portfolio.
A diversified portfolio delivers 2X+ more retirement spending
Cash Equivalent Portfolio vs Diversified Portfolio Comparison
Assumes starting balance of $100,000 which grows annually by 1.7% (Cash Equivalent Portfolio) and 6.5% (Diversified Portfolio) over 20 years. Growth rates are based on historical averages from 2009-2025. Source
What does Fisher\SMB do that a recordkeeper doesn’t?
- Helps mitigate conflicts of interest
- Designs and builds a plan tailored to your business needs
- Creates a custom fund lineup from more than 25,000 options
- Monitors investment performance and adjusts as necessary
- Conducts service provider reviews, benchmarks fees, and serves as your advocate to resolve issues
- Runs education meetings and promotes plan participation
- Provides guidance to employees on savings rates, investment mix, and retirement planning
- Regularly reviews plan design to evolve as your business grows
For most small businesses, the more important consideration isn’t the cost of a retirement plan advisor, but the potential costs of going without one.
What this means for you
- Simpler, less time-consuming plan administration
- Compliance/legal protection and peace of mind
- Potential for stronger retirement outcomes for employees
- A valuable tool for recruitment and retention
Have you outgrown your current provider?
Reach out to Fisher\SMB for a complimentary third-party review of your plan provider(s).
For 15 minutes of your time, you’ll take away documentation that meets your fiduciary compliance duties for the year.
And you may discover opportunities to create a lower-cost, higher performing retirement plan custom-fit to your company’s needs
Click to Schedule a Consultation
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