American workers who don't think twice about their employer-sponsored 401(k) plans may be surprised to learn that fees can cut their retirement savings by 30 percent over a lifetime.
A household with two people earning the median income of their age group from 25 to 65 will pay an average of $154,794 in 401(k) fees and lost returns, according to a report from progressive, non-partisan public policy research group, Demos, based in New York.
The $154,794 is 30.3 percent of that household's retirement balance of $509,644 that is lost to fees.
(Image credit: Demos)
The median 401(k) balance was a scant $23,000 at the end of the first quarter this year among Fidelity Investments' 11.8 million accounts.
The higher your income, the greater the absolute value you pay in fees.
A dual-earning household in which each partner earns an income greater than three-quarters of Americans each year over their lifetime can expect to pay as much as $277,969.
Robert Hiltonsmith, policy analyst at Demos, said the most surprising finding was how much of a retirement balance can be lost to fees.
"I knew it was going to be a lot I didn't realize it was going to be more than 30 percent of what your retirement nest egg would have been," he said.
Hiltonsmith said workers with 401(k) funds can act to minimize the fees for their accounts.
First, workers should learn what their fund's expense-ratio is. An expense ratio is a mutual fund's fixed costs, such as administrative and marketing fees divided by the total assets of the mutual fund.
In the 401(k) funds available to Demos employees, the expense-ratios range from 0.70 to 1.3.
You can find most fund's expense-ratios and compare funds on sites like Morningstar.com and Brightscope.com. Starting July 1, 401(k) providers will be required to disclose fees and expenses according to a rule first approved by the Employee Benefits Security Administration's rule in October 2010.
Higher fees do not guarantee a higher return, the report states.
Second, workers can ask a financial advisor about shifting their money into lower-cost funds.
Actively-traded funds, which aim to maximize returns by rapidly buying and selling assets, incur much higher trading costs than passive funds, such as index funds. The latter invests in a set diversified portfolio or in a fixed mix of assets.
Another step workers can take is asking their employer about having lower-cost 401(k) options available or switching providers.
"I think the major point that we want a lot of people to take away from this is that these high fees in the system are part of the greater shifting of retirement risks and costs that have happened in the past 30 years," Hiltonsmith said. "They shifted from the shared responsibility of employers and employees to solely on the backs of employees."
"The system isn't suitable to be the main place for workers to save for retirement. It's not safe and it's not low cost," he said. "It's not suitable to be the primary place to supplement Social Security."
The mutual fund industry provides a different picture.
The Investment Company Institute, a fund industry trade group, said the average person pays $248 a year in 401(k) fees, according to a study last year. The Los Angeles Times reports that would cost the average dual-income household under $20,000 while working over four decades.
But Hiltonsmith said the institute does not take into account trading fees, which represent nearly half of fees paid in Demos' calculations.
Second, the household in our model is able to make consistent - and increasing - contributions each year, and never withdraws or cashes out their balance due to a life trauma or shock, Hiltonsmith said.
"Most households, however, don't have the economic or job security for this to be the case, and aren't able to do one of both of these things," he said.
Hiltonsmith said the institute uses the median retirement balance, which is low because of the economic realities faced by most households trying to save for retirement.
The 30.3 percent figure that Demos discovered doesn't vary based on household contributions or balances.
"And that percentage bite is, I think, the number to focus on," Hiltonsmith said.
(Image credit: Demos)
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