MUST READ: Why Your 401(k) May Be Worth Less Than You Think

Why Your 401(k) May Be Worth Less Than You Think
by NPR Staff - Morning Edition
6/21/12

Small Fees Take A Big Bite

Imagine you were 35 years away from retirement with a $25,000 401(k) balance and an average annual return of 7 percent. If fees were 0.5 percent, your investment will be worth $227,000 after 35 years. However, if fees were 1.5 percent, your balance will be worth $163,000. A 1-percentage-point fee difference reduces your savings by 28 percent.
Small fees can make a dramatic difference in your retirement savings.

As Americans watched their nest eggs sink during the Great Recession, many wondered whether they would ever be able to retire. Come this fall, millions of workers who invest in 401(k)s will learn their plans are probably worth even less than they thought.

"Fees take away from the accumulated savings of your lifetime," says Mary Beth Franklin, a contributing editor at InvestmentNews.

As of July 1, the Labor Department will require 401(k) plan providers to clearly disclose how much in fees they're charging on those retirement savings. Plan participants will see those fees detailed in their third-quarter statements, which will arrive around Thanksgiving, Franklin tells Morning Edition co-host Renee Montagne.

Fees can range from 1.08 percent (for plans with more than $100 million in assets) to 1.90 percent (for those with less than $10 million in assets), according to a report from the Government Accountability Office. Plans with fewer than 100 members — which account for 88 percent of plans — averaged about 1.30 percent in fees.
Interview Highlights

On why these fees are hidden

"If the employer is in the business of making widgets, all he wants to do is make widgets, and he's offering the 401(k) plan as a way to attract and retain employees, and wants to offer a good plan but as cost-effective as possible. And if a financial services company comes to him and says, 'Oh, we can set up this whole plan and it's not going to cost you anything,' he may take that at face value. But various commissions and load fees and administrative fees may be woven into the cost of the plan, and they're not apparent."

On what you can do with high fees - Fees, Fees And More Fees

Administration fees. These cover the daily functions of a 401(k) plan, including record keeping, legal disclosures and trustee services. Those fees also help pay customer service, educational seminars and online services.

Investment fees. Associated with managing plan investments and generally are assessed as a percentage of assets invested and deducted immediately from your investment returns.

Individual service fees. Associated with 401(k) plans that offer optional service features and are charged separately, such as for taking a loan from the plan.

More fees. Investment-related fees include sales charges, which are the costs of buying and selling shares; asset-management fees; and fees for other services, such as recordkeeping and investment advice.

Source: Labor Department

"You can't just opt out and say, 'OK, I just want a whole new lineup of funds.' The 401(k) is offered for the benefit of all the employees. But that would certainly start some water-cooler and cafeteria conversations, I think, to go to the employer or to your 401(k) investment committee, whatever, and saying, 'Hey, this is a lot more than we thought. Can you take a look at our plan and see if we're getting the best deal for our money or are there lower-cost alternatives?'

"Now, some people worry that a negative impact of this could be employees could look at this statement and say, 'Wow, I'm paying all of this in fees. What's the point? I'm not even going to save anymore.' Frankly, I don't think that's going to happen. I hope that doesn't happen. I hope this becomes a tipping point for real conversation about our retirement system. People are realizing they have to be more responsible with their own savings, but employers should give them the opportunity to get the biggest bang for their buck."

On how companies may react

"This is costing employers a lot of money to offer this. Certainly, there [are] tax incentives involved, but they don't want to be spending more money than they need to on a plan nobody likes. So the incentive is all-around for employees and employers to take a clear look at what they're getting, and they may be surprised and then take steps to make it better. I think this will influence fees across the board in 401(k) plans — plan providers — because there was this veil protecting the amount of fees they're charging. Full disclosure is going to put down more pressure on these fees. I think it's a good thing in the long run."