Where is Your 401(k) Going?

Posted by - Monday, July 2nd, 2012

Are you aware of all the fees attached to your retirement savings account?

Many people are at least vaguely aware that fees are applied to their 401(k)s. But not too many are aware of the rate of deduction, and even fewer have considered what that means over the long-term.

First consider that a 401(k) depends on the long-term—what you save up now will only really matter come retirement. So what is being deducted now will take away from that.

And a study by advocacy organization Demos is urging 401(k) holders to focus on the long term.

According to the study, written by Robert Hiltonsmith and entitled “The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s,” the average two-earner family loses roughly one third of their savings to these hidden fees.

For the average family, these deductions hover around $154,794 by the time of retirement.

Two types of fees are highlighted in this study: expense ration fees and trading fees.

An expense ratio fee is generally a stable annual deduction for administrative, investment management, and marketing fees. Trading fees may change annually and are accrued from buying or selling mutual fund securities.

And these can run fairly high, considering. The study averaged expense ratios at 1.27% and trading fees at 1.2%.

Bob Sullivan of MSNBC pulled out one specific point from the Demos study that he though was under-emphasized, and the was the example of an imaginary “perfect” couple.

This couple, which never withdrew from the 401(k) and which consistently made contributions, factors that Sullivan notes is extremely unlikely for any normal couple, they still were only able to accrue $350,000 by the time they retired. And that's between the two of them.

Back in 2007, there began to be considerations of disclosure on 401(k) statements. Very soon you will begin to see how much is being taken out in fees.

And yet this might not actually infuriate 401(k) holders as it should.


“It will be underwhelming from a sticker shock point of view. It will not have the effect the doomsayers predict,” Hiltonsmith said. The dollar amount shown will reflect annual amounts, not the real harm from loss of compounding growth, he said. A 27-year-old with $10,000 invested in a mutual paying a 1 percent expense ratio will pay only about $100 in fees in a year, a number that will hardly inspire shopping around, Hiltonsmith figures.

And so savers will continue to be subjected to these high fees, ending with much less than they might desire (or even expect) when they retire.


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