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.
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.