401(k) Fees Can Chew Up Your Nest Egg
You may think you're getting a juicy return on the money invested in your 401(k). But if you're paying hidden fees, or haven't taken time to learn about your plan's expenses, your nest egg could suffer.
More than 80 percent of 401(k) participants report not knowing how much they pay in fees, according to the AARP Public Policy Institute. The average 401(k) investor who is in a 500-participant plan and has $50,000 invested pays about 1.2 percent of his or her assets, or $599, annually in fees, says HR Investment Consultants. The group found 401(k) plans charging fees ranging from0.42 percent (or $211, in the same example) to 1.64 percent ($822).
"There are plans all across the country that operate for as low as a half-percent cost to participants," says Stephen Butler, president of Pension Dynamics Corp. He suggests that 0.5 percent is a reasonable expense level to aim for when looking to minimize 401(k) costs. "If a half a percent is doable, then you have to ask yourself, 'Why am I paying an extra half a percent? Are we getting some services as participants to justify that?'" Find out if you are getting extra value for that additional money you pay in fees, Butler says.
The consequences of paying high fees are considerable over time. A 45-year-old who leaves $20,000 in a 401(k) for 20 years, and earns an annual net return of 6.5 percent, will have $70,500 at age 65. However, if that same person is charged an extra 1 percentage point in fees (cutting the net return to 5.5 percent a year), he will have accrued only $58,400 by age 65, 17 percent less.
"Employees should be concerned about fees that are being charged to them for services they don't receive," says Matthew Hutcheson, an independent pension consultant. For example, you could be paying for 401(k) investment education services that you have never used. "You should always ask your employer about what information they have on the fees that the different options charge," recommends Barbara Bovbjerg, director of education, workforce, and income security issues at the Government Accountability Office.
The most common type of 401(k) charge is an investment fee. This is levied by the company that manages the mutual funds, usually by deducting a fixed percentage of your assets from investment returns. Employees are also being charged record-keeping fees for the cost of administering the accounts, which can be changed as a percentage of assets, a flat fee, or both. "The cost of administering a 401(k) plan ideally should be paid by the company as a tax-deducible business expense," Butler says. "Participants are being asked to pay a bill with money that is not tax-deductible and with money that could otherwise be compounded in a tax-deferred account."
Other charges to watch out for include trustee fees, audit fees, legal fees, investment consulting fees, and communication fees. But it's not always easy to tell what kinds of fees you're paying. "Employees don't receive all [the fee information] in one place, so it's difficult for people to piece things together for these types of plans," Bovbjerg says.
The Employee Retirement Income Security Act does not require plan sponsors to disclose comprehensive fee information to participants. Information about fees is often disclosed to participants in a piecemeal way, if at all. But there are some places you can look for fee information. Two documents, the summary plan description and the account statement, may contain information on how investment or record-keeping fees are charged to participants, but the fees are not required to be listed there for all 401(k)s. The summary annual report and fund profiles on the company's website will include the total plan costs incurred during the year.
"The only thing employees can do is when they recognize they have a plan that is falling short of expectations is pressure their decision makers to come up with a better plan," Butler says. "In many cases, even decision makers are not aware of what employees are being charged."
Americans had $2.5 trillion invested in 401(k)'s in 2006. Let's say they pay an average of 1.2 percent a year in fees on their assets. That would come to $30 billion annually. It's no wonder the financial services industry keeps encouraging workers to sock money away in their 401(k)'s.