By Jonnelle Marte
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 Demos report grossly mischaracterizes the 401(k) system,” Brian Reid, chief economist for ICI, a fund industry trade group, said in a statement. ”The report incorrectly uses ICI data in making calculations that do not recognize our research findings that mutual fund costs in the 401(k) market tend to be lower than fees for the average fund.”
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 BrightScope, a financial research firm.
Advocates hope new rules from the Department of Labor, slated for July 1, will give savers the real number. The rules require financial institutions to disclose fees and administrative costs to employers. Employers must then pass that information along to participants by Aug. 30 and on an annual basis after that. The goal of the regulation, experts say, is to encourage employers to compare the costs of competing plans and to give investors a clear idea of how much they’re paying for record-keeping, transactions and other services.
For its part, Demos says its estimate that fees eat up 30% of balances would decrease for savers who have access to larger, lower-cost plans than the one it used in its model. But Hiltonsmith argues that not all retirement savers have access to such plans. The group assumed a couple worked from ages 25 to 65, saving 5.3% of their salaries at the start of their careers and gradually increasing that to 9.2%. That money was invested in a hypothetical stock-index fund that charged 0.95% and the other half was in a bond-index fund with an expense ratio of 0.72. Hiltonsmith also added trading fees equal to the expense ratio for the stock fund and of 0.5% for the bond fund.
Even before the new disclosure rules take effect, retirement savers can use various tools to estimate how much they’re spending on fees. AARP has a 401(k) fee calculator that tells people if the fees on their funds are above average and estimates how fees might be reducing their retirement income. BrightScope also offers a tool to help people estimate how much they might save by moving to another plan.
Note: This post has been updated to include a comment from the Investment Company Institute.