401k Expenses Still a Pernicious Rip-Off
Do you know how much your 401k is costing you? I would wager not, nor have you ever asked your employer about costs or looked in fund documents to find out. Chances are, it’s far too much and it’s eating away your retirement nest egg.
Upcoming Labor Department regulations mandating disclosure of retirement-plan costs are long overdue. Even then (I haven’t seen the final version yet), they may be so bureaucratic that millions may ignore them.
Still, a nagging and costly question persists. Whenever I asked the question “how much are 401k savers being overcharged” over the years, I haven’t been able to get a decent answer. The government doesn’t really track it and the middleman and your employer don’t want you to know.
Fortunately the progressive group Demos did their homework recently and came up with some ominous numbers. The organization has done some quality work on retirement security and published an independent research project I wrote last year on structured products. So I know and trust them.
Here’s what they found:
- “An ordinary median-income, two-earner household will pay nearly $155,000 over the course of their lifetime in 401(k) fees, according to Demos report `The Retirement Drain: The Hidden and Excessive Costs of 401(k)s.’
- The nation’s shift in retirement policy toward individual retirement accounts has made savers vulnerable to losing almost one-third of their investment returns to a complex, inefficient market.
- Sixty-five percent of retirement savers have no idea they are paying `off-the-top’ (retail) expense ratio and trading fees, according to the report. While reforms like the fee disclosure rules from the U.S. Department of Labor (slated to take effect July 1) are positive steps, the Demos model described in their report shows how listing fees on account statements will not address the other factors that keep fees high nor fix the structural weaknesses in the current risky, individualized retirement system.
The report, by Policy Analyst Robert Hiltonsmith, lays out four key problems:
- The complex relationship between savers, employers, plan recordkeepers and investment funds creates additional costs, the majority of which are borne by savers;
- The individualized market is inefficient; for example, the $17.5 trillion savers invested in 2010 is spread among thousands of funds, meaning that savers do not benefit from the lower costs and pooling of risk that come from economies of scale;
- Employees cannot decode the sophisticated menu of funds offered by their employers, and a majority mistakenly believe that higher fees guarantee higher returns;
- Employers have little incentive to insure their employees have the best possible plan and are increasingly choosing plans with high expense ratios, passing 91 percent of the costs to employees.
“Asking struggling American households to pay upwards of $155,000 in fees for retirement savings is more than patently unfair, it’s immoral,” said Hiltonsmith. “401(k) and IRA fees are a hidden drain on the retirement savings of hardworking Americans.