Question: How much money are you paying in 401(k) fees?
Answer: Have you thought about buying a home lately?
That’s right. According to Robert Hiltonsmith at Demos, a New York based think tank, we could purchase a residence with the amount of money the financial services and retirement industries siphon out of our 401(k) savings over the course of our careers. His recently released report, TheRetirement Savings Drain, calculates that the average household will pay almost $155,000 over the course of a lifetime for the privilege of saving their own money, just slightly under the median price of a previously occupied home in the United States, according to the National Association of Realtors.
“There is ample evidence that these fees are excessive,” Hiltonsmith writes, pointing to the fact that the costs of running a traditional pension are significantly less than that of administering a 401(k).
As of the end of 2011, Americans collectively had $4.5 trillion in savings in defined contribution plans according to the Investment Company Institute, an interest and lobbying group representing the mutual fund industry, a sum that sounds extraordinary but is actually anything but when you realize the average amount contained in those accounts is a mere $75,000. The vast majority of Americans over the age of 55 have less than $250,000 in their accounts, significantly less than the $1 million most financial experts recommend we should have on the day we receive the golden handshake. In fact, $250,000 is a mere $10,000 less than the amount Fidelity Investments predicts a couple exiting the workforce in 2012 will spend of their own money on medical bills in retirement.
Yet, amazingly, despite the obvious fact that we needed every penny we could save, determining how much we are losing in fees has been the subject of much speculation and controversy, since until recently there had been no requirement until recently that plan participants be informed of how much money is being siphoned out to pay for everything from administrative expenses to the costs of actually investing. This will change on July 1, when retirement plan administrators will have to begin the process of making sure we are informed of their bill.
Yet how much of an impact revealing the fees to the 401(k) plan participants is still to be determined. First, there is some evidence to show that even as the fees themselves are decreasing slightly as a result of all the attention paid to the issue, that might not be making as big a difference to our 401(k) bottom lines as we would hope. According to a report issued by the Investment Company Institute and Deloitte, employers are thrusting more of the plan charges onto their employees, with the result that workers are now responsible for 91% of plan expenses, an substantial increase from 2009, when they covered 78% of such charges.
But it goes deeper than that. It’s not as though employees have any power over the 401(k) plan their employer chooses to use. Sure they can lobby for improvements, but that’s no guarantee anything will actually change. After all, the complexity and the inefficiencies of the system are in someone’s interests, but that isn’t you the consumer, it is the financial services firms marketing these plans and investment choices contained in them. “Since the fees that comprise the expense ratio are paid by the unwitting savers, mutual funds have little incentives to keep those payments to recordkeepers low,” Hiltonsmith writes, “Along with payments to middlemen in the 401(k) system — such as stockbrokers and exchanges paid commissions to execute purchases and sales of assets for the funds, as well as the high salaries and expenses of the mutual funds themselves – the expenses incurred by all layers of this complex system are passed directly on to investors.”