• SmartMoney

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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