How do 401(k) fees affect your bottom line?
With nearly 50 million U.S. workers depending on their 401(k) plans for future income, investment fees and related retirement-plan expenses are getting a lot of attention. In a 2006 report on 401(k) fees, the Government Accountability Office (GAO) concluded that such charges could "significantly decrease retirement savings."
Even a one-percentage-point difference in fees can have a big impact. For example, let's assume that a 35-year-old worker leaves $20,000 in his 401(k) plan when he switches jobs and never adds to that account. If the account earned 7% a year, minus 0.5% in fees, his balance would grow to about $132,000 at retirement. But if the fees were 1.5% annually, the average net return would be reduced to 5.5%, and the $20,000 would grow to about $100,000. Over 30 years, the additional charges whittle the account balance by nearly 25%. (Click here to Roll Over Your High-Fee 401(k))
Despite the potentially devastating impact of excessive fees, the U.S. Department of Labor received only ten complaints in 2005, indicating that few plan participants are concerned about or even aware of the problem.
The GAO report recommended that Congress require 401(k) plan sponsors to disclose fee information on each investment option to plan participants. (Legislation has been introduced in both the House and Senate.) The GAO also urged the Labor Department to require plan providers to disclose more information to employers, including revenue-sharing arrangements that may result in higher costs to 401(k) participants.
Although the Labor Department has issued proposed regulations to improve fee disclosures, they apply only to the employers who sponsor retirement plans and not to employees, who often bear the brunt of the overhead. The department is expected to issue another proposal soon detailing which 401(k) fees should be disclosed to plan participants.
If your 401(k) fees are too high . . .
If you think your plan fees are out of line, Loeper suggests that you contact your boss in a non-confrontational way, show how much you are paying in 401(k) expenses and ask if your plan could offer some lower-cost alternatives.
And spread the word to your colleagues. "Your one voice may not be enough," says Loeper. "But if your employer receives just a couple of additional questions from other employees, it's likely the company will wake up and take notice."
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