Mutual fund fees in 401(k) plans can look tiny—a median of 1 percent of assets per year, says financial-data provider Morningstar. But over a lifetime of saving, they can really scramble your nest egg. A recent study by Demos, a research and advocacy group, found that an American household of two median-income earners will pay, on average, almost $155,000 in 401(k) fees over 40 years. Yes, you read that right.
REPORT: The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s
“This household could have bought a house with the amount they paid in fees,” the report notes. And because mutual funds in 401(k)s take fees off the top before reporting rates of return and share prices, “account holders generally have no inkling how much all of this costs them.”
Compare, for example, the net expense ratios—operating costs—of ING Thornburg Value Portfolio Advisor Class with those of Nationwide S&P Index Institutional Class. Morningstar says both funds benchmark the same financial index. But the ING fund charges $13.90 per $1,000 invested annually while Nationwide charges $2. Growing at 9 percent annually over 20 years, $10,000 invested with Nationwide would grow to $53,847, compared with just $42,358 with ING, a difference of $11,489.
Net expense ratios are only part of the picture. Trading fees could add 1 percent to what you pay, Demos says.
High expenses can weaken even funds with above-average returns. A 2010 Morningstar study found that low-cost mutual funds consistently performed better than high-cost funds, regardless of asset class or time period.