A recent survey revealed that despite 408(b)(2) disclosure and similar attempts to simplify fee schedules, 401(k) fees remain a black box for most Americans, with two-thirds (71%) responding that they don’t know the amount they’re currently paying in fees.
“The unfortunate reality is that paying higher 401(k) fees than you need to can add years onto your working life”
Additionally, Americans grossly underestimate how much they’re paying and therefore just how much they can save, according to automated 401(k)rollover firm Capitalize. Nearly half estimate they’re paying less than .5% of total assets in 401(k) fees and costs—but only 10% of all plans charge less than .4%.
“The unfortunate reality is that paying higher 401(k) fees than you need to can add years onto your working life,” Capitalize writes.
It explains it using the following example:
Imagine two people, both of whom are 25 years old, earn $100,000, and will be ready to retire as soon as they’ve personally amassed $1,000,000 in retirement savings. Ryan annually invests $10,000 into his 401(k) plan on a pre-tax basis and can earn an average of 8% on his investments. The investments available in his 401(k) plan are expensive, though, and average a cost of 2% annually. As a result, Ryan’s net annual return is 6% (8% gross return less 2% in expenses). Assuming these variables, he can expect to retire at age 58.
The second person, Haley, is the same age, earns the same salary, and makes the same 401(k) contributions. However, she has elected to invest in lower-cost options in her 401(k) plan and pays .50% annually in total fees.
As a result, her net return every year is 7.5% (8% – 0.50%). Assuming these variables, Haley can plan to retire at age 54. That’s 4 years earlier than Ryan, all because she was aware of the impact fees can have on her returns. When negotiating jobs, we talk about leaving money on the table—but what about giving up years of our lives when we quit and leave behind our 401(k)s?
It offered three suggestions for participants
- Track down exactly what fees you’re paying. Review your old company’s 401(k) plan document and contact your former employer’s HR department if you can’t find yours.
- Understand what’s reasonable to pay. Most people don’t think in expense ratios, so it’s important you find a smart resource that translates these fees into potential losses.
- Think about moving your old 401(k) into a low-fee IRA. You’d be in good company—two in three Americans said they would consider rolling over their old 401(k) into an IRA if it meant saving money on fees. Even better, data analyzed by the Center for Retirement Research shows you can save $700k over your lifetime just by rolling over a high-fee, poorly allocated 401(k) into a low-fee, well-allocated IRA.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
