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Which Is Cheaper to Run: 401(k)s or Social Security?

After reading our story “The Big Business of 401(k) Plans,” some readers wrote to us wondering which of America’s retirement pillars, publicly-run Social Security, or privately run 401(k)s cost more to run. We went back to our sources to investigate – and the results might surprise some people.

First, the private sector. Based on industry figures for different-sized plans, we estimate that fees suck $30 billion to $60 billion each year out Americans retirement accounts — up to $164 million each day. We presented the figures to the industry’s trade group, which declined to confirm the numbers, but also didn’t dispute our methodology. So how much does Social Security cost? $11.5 billion, according to the Social Security Administration. That translates into about $31.5 million a day. The government, unlike the industry, publishes the cost figure. In short, it appears that the big government-run program is more cost effective.

Of course, the programs aren’t exactly apples to apples. About 51 million Americans have a 401(k). Virtually all Americans hold a Social Security card. On the other hand, administering defined contribution plans is pretty complex — you don’t log onto your Social Security account to check your daily balance and redirect investments. And yes, 401(k) costs are driven higher, especially at smaller plans, by government rules designed to prevent fraud and self-dealing.

Perhaps a better way to evaluate the appropriateness of 401(k) fees is to look at how much investors pay for nuts-and-bolts administration versus how much they pay for bells and whistles, like advice and actively managed mutual funds. Again there’s no way to tell precisely. But you can get a good idea by looking at the 401(k) Averages Book, which publishes list prices for plans of different sizes. For a plan with 50 participants and $2.5 million in assets, “all in” plan costs range from from $10,192 a year for a bare bones plan to $47,984 a year for one with all the extras. Do you need or want those perks? Surely there is no right answer for everyone. But at least remember this: Wall Street’s bottom line depends on convincing your employer and regulators that you do.


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Comments (5 of 21)

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    • You can’t compare the two systems. Not because, as some commentators stated, that Social Security is a Ponzi scheme, but because Social Security is INSURANCE. A 401(k) plan, however, is a savings plan that is meant to be separately invested. Of course Social Security it cheaper to run, any insurance scheme or Defined benefit scheme is always cheaper to administer. The idea that one or the other is superior is ludicrous. The two are meant to COMPLIMENT each other. You have your own savings which you invest as a hedge against inflation, while Social Security provides you with a bottom line income you can depend on in times when the market drops. The idea of dropping SS for additional savings-types plan is, in the long run, foolish. Instead of comparing what you would have made on your Social Security investments to your 401(K) investments, I suggest you take the money you invested in SS then go into the insurance market and try to buy a lifetime annuity with inflation adjustments. You’ll soon see what a “bargain” SS truly is.

    • I agree totally with what RNR said – couldn’t have said it better!

    • “And yes, 401(k) costs are driven higher, especially at smaller plans, by government rules designed to prevent fraud and self-dealing.”

      That right there is hilarious. Besides the many cogent points made by commenters above.

      Tell me about “government rules” on SSD fraud, please. Tell me about “government rules” on “self dealing” that leads my SS contributions to be spent for US budget needs, instead of “lock boxed” for my retirement.

      Tell me where my employer “match” goes in SS.



    • I’m shocked that SmartMoney would allow a thoughtless, financially illiterate post like this to be published under its brand. Besides the obvious feature disparities between the two, it is impossible for 401(k)s to run up unpaid liabilities, while Social Security has long term liabilities in the trillions.

      A more honest and educated comparison would compare the estimated costs, dollars in and out from both individuals and government, over the next 50 years.

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