The High Cost of Retirement
A study published in 2012 by the Demos research and policy center indicates that higher-than-average fees on a 401(k) plan can, over the lifetime of a person’s participation in the plan, drain anywhere between $155,000 to $278,000 from the ultimate payout of the plan depending on the earning ability of the plan participant. That’s hardly a small amount of money no matter how much you earn. It is therefore natural for people participating in a 401(k) plan to want to understand what fees they are paying on their retirement plan, and if those fees are reasonable.
Despite federal law requiring full disclosure of fees on 401(k) plans, as well as the publication of numerous reports on the flaws and potential pitfalls of 401(k) plans, many people remain in the dark in regard to the fees they are paying on their retirement plans. Plans often involve obscure fees and services that revolve around the regular administration and management of the fund, and while some employers absorb these fees as part of their retirement plans for their employees, many do not. It is exactly these fees that may be eating into your retirement nest egg.
By adding up your fund totals, as shown in your most recent account statement, as well as the expenses you’re paying out on each particular fund, you can determine exactly how much you’re paying in fees on your retirement plan. As a general rule of thumb, fees totaling 1% or less on your current plan balance can be considered reasonable costs. Many smaller plans will include fees for an investment broker or consultant, of which an additional 2% charge is standard.
Hidden charges start to accumulate when you consider other fees. Fees for record keeping, for example, can go up as total asset valuation appreciates from year to year. Revenue sharing, the practice of sharing fee income between fund managers and other service providers, has been likened to a kickback, as it provides little value to plan investors. These are just some of the examples of fees that may be eating away at your retirement.
Short of an independent audit to determine whether or not the fees on your plan are appropriate, there are steps you can take to help you get an idea on whether or not you’re paying too much. Websites such as brightscope.com and morningstar.com allow you to compare your plan with similar 401(k) plans and look up individual fund expenses. Personal Capital’s website has a free 401(k) Fee Analyzer that can help you see how fees are affecting your retirement. Lastly, the website of the Department of Labor has lots of information on 401(k) fees and fee disclosure. And of course, you can always contact us. We’d be happy to review your 401(k).