Do You Know What You Are Paying in Fees & Expenses in your 401(k)?
Well if you don’t, you’re in good company. According to Secure Retirement Institute (SRI) research, 50% of participants have no idea what they pay. Nearly 40% of participants in a qualified (to pay taxes later) retirement plan like a 401(k) think they don’t pay any fees and expenses at all.
Reform & Disclosure Regulations? Huh? What?
“In 2012, the Dept. of Labor issued final regulations requiring the disclosure of fee and expense information to defined contribution plan participants and sponsors. The intent was to provide greater transparency and awareness to the costs of providing and participating in an employer-sponsored retirement plan, according to a recent LIMRA Secure Retirement Institute (SRI) report.
Unfortunately, what seemed like a good idea on paper didn’t really work in reality. In fact, research suggests these disclosure rules have had little effect on participants’ knowledge of them.
Consider: Since July 2012, the SRI has conducted a series of consumer surveys asking defined-contribution plan participants about their retirement plan fees. Its 2012 survey, conducted prior to the initial participant disclosure, showed that 50% of retirement plan participants do not know how much they pay in fees and expenses.
One year later, a follow-up survey tells the same story. The disclosures have had little impact as there is no noticeable difference in participant knowledge of the fees they pay, SRI wrote.
Meanwhile, the SRI’s 2013 findings show that half of participants do not currently know how much they pay in fees and expenses. Further, nearly four in 10 still believe that they do not pay any fees or expenses. One-third of plan participants believe they pay more than 10% in total plan fees. And only 12% of defined contribution plan participants were able to estimate a percentage”.
From 7 worst 401(k) mistakes by retirement savers, Robert Powell, Marketwatch 3/8/14
Here’s another shocking stat for many: According to a 2012 report from Demos, a median income ($50,000) family could pay $150,000 in 401(k) fees and expenses over the course of a lifetime. That’s 3 years of annual income!
Types of Fees
There are two main types of fees that contribute to the overall cost of having (participating in) a 401(k). The first is actual plan fees and expenses. This may include the costs of administering the plan as well as investment management. The Society for Human Resource Management (SHRM) reports this is on average 1.4% for all employers, 1.5% for small plans (<50 participants) and 1% for large plans (>1000 participants).
What they still leave out of the equation are all the fees and expenses of the underlying assets, often professionally managed mutual fund shares. These fund expense and fees can take another 1 or 2 percentage point (or more) bite out of your actual return.
What Does it Mean?
So what does 2% or 3% total mean over the long haul? Consider this purely hypothetical example. Ignore type of plan or fund or any taxes; this is just math:
An individual contributes $500/month ($6000/year) to something for 30 years. At the end of that 30 years if he got an 8% rate of return he’d have $734,075. What if he paid 3% in fees and expenses meaning he only realized a 5% return? He’d have $418,565 or 43% less! Only 2% fees & expenses or 6% return? He’d have a slightly better $502,810 or only a 32% haircut.
Here are some helpful hints from the SEC on all the different types of fees
Here is another good report on fees from the Department of Labor
Check Your Own Funds!
Don’t take my word for it (or the SEC or DOL), visit the FINRA Fund Analyzer. Put your fund’s ticker symbol or search by fund name (you should be able to find this on a statement) and see what your fees and expense look like. Remember these are just the fund expenses. On top of those you have the actual 401(k) plan expenses.
The variances can be startling: I pulled up two funds at random, one each from probably the two most well-known names in funds. One professionally managed “active” (expensive) fund and one “passive” index-based fund. The professionally managed fund was 1477% (nearly 15X) more expensive. Interestingly the index fund actually performed much better even ignoring costs over the last 10 years. In fact studies after studies on investment returns have shown that actively managed funds on average fail to do any better than indexed funds.
In fairness to fund options in qualified plans, like 401(k)s, there are a number of very low fee/expense index funds. You still have the plan expenses but at a large company these can be well under the 1% average and you have very nominal (.2% or thereabouts) fund expenses. You still have a big tax bill coming later, but at least you aren’t giving up 32%-43% of your gains in expenses.
But talking about “average” fund fees and expenses or discussing what someone else is paying really is just trivia. The real question is what are you paying?
Note: Mr. Arlinghaus is not an Investment Advisor and does not give investment advice or make investment recommendations. The information here is simply third party data presented as a resource to the reader.