Do you know how much you’re paying in 401(k) fees?
Surveys and studies suggest many Americans have no clue. But a report released last week estimates the average American household pays nearly $155,000 in 401(k) fees over the course of a lifetime — or roughly 30% of their 401(k) balance. That’s enough to buy a house, says Demos, the non-partisan public policy group behind the report. “Every little bit more in fees takes a really big chunk out of your end balance,” says Robert Hiltonsmith, a policy analyst with Demos and the study’s author.
The report sparked criticism from industry players, who say the figure is overstated, and that most retirement savers have access to lower-cost funds. Indeed, other studies estimate the average fees to be much lower. A November 2011 report from Deloitte Consulting LLP done for the Investment Company Institute, a fund-industry trade group, found that the typical 401(k) participant paid $248 in record keeping, administrative and investment fees a year. That number decreased to $122 a year for people in the lowest-cost plans and hit $558 a year for those in the highest-cost plans.
The problem with fees isn’t the amounts, industry pros say, but that most people are unaware how they work. An AARP survey from last year found that 62% of 401(k) account holders didn’t know how much they were paying in fees, and 71% didn’t know they were paying any fees at all. The confusion exists, the report says, because all fees aren’t clearly laid out on the summaries investors check regularly. Many investors also don’t read the prospectuses disclosing the fees and it is difficult to accurately add up trading fees and fees shared between fund firms and plan providers, says Hiltonsmith. “Most people think they’re not paying any fees,” says Mike Alfred, co-founder of BrighScope, a financial research firm.