Report: 401(k) Fees Can Cut Nest Eggs 30%

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May 31, 2012
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Just how badly are U.S. investors being ripped off in their 401(k) plans?

The median-income two-wage-earning American family participating in a 401(k) retirement plan loses nearly one-third of its nest egg to fees, according to a new report by the New York City-based public policy organization Demos, which slams high-priced mutual funds for their poorly understood costs.

The report, “The Retirement Savings Drain,” comes at a time of increased scrutiny of the U.S. retirement system, which accounts for $9.2 trillion that savers had invested in IRAs and 401(k)s as of 2010, and argues that fees and lost returns in 401(k)s cost the median-income two-wage family almost $155,000.

The problem is that many families don’t realize how much they are really paying due to lack of information about 401(k) plans and standard operating procedures in the mutual fund industry, the report argues.

Worse yet, higher-income two-wage families—those who earn above the 75th percentile of American households—have paid as much as $277,969 in fees by the time of retirement, according to Demos’ calculations.

The author of the report, Robert Hiltonsmith, a policy analyst in Demos’ Economic Opportunity program, said retirement plans based on ETFs—which he noted are advocated by the Center for Retirement Research—would eliminate many of the problems.

“The costs of mutual fund shares is set by the mutual fund company,” Hiltonsmith said in a phone interview. “ETFs are much more transparent—the share price is always available and the costs of the trading are borne by traders.”

On its website, Demos calls itself a multi-issue national organization that works with policymakers to foster economic equality, a robust democracy and a strong public sector.

Changes Coming

Under a U.S. Department of Labor rule change to the Employment Retirement Income Security Act of 1974 (ERISA) scheduled to go into effect July 1, retirement plan fiduciaries will have to be more explicit about the fees they charge by providing information on the total indirect and direct compensation they receive annually.

ERISA is the federal statute that pretty much put the nail in the coffin of so-called defined benefit pension plans that employers ran on behalf of their employees.

In place of such DB plans, ERISA ushered in 401(k) plans, which have come to increasingly dominate the retirement plan landscape.

The problem, as the Demos report argues, is that many employees haven’t a clue what they’re paying.

Hiltonsmith lamented the fact that the new Labor Department rule will make only some 401(k) fees explicit.

 

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