It’s time employees learn to answer the $64,000 question, Labor Secretary Alexis M. Herman said recently. “Just how much am I paying in fees tied to my 401(k) plan?”
Figuring out the cost of participating in your retirement plan is no picnic, Herman acknowledged in a telephone news conference to announce the launch of a free booklet on how consumers can unearth information about 401(k) fees. But it is well worth it.
Just a 1 percent difference in 401(k) fees can cost workers a small fortune, she said. In fact, it cost one young worker precisely $64,000, Herman said. Some workers can be robbed of hundreds of thousands of dollars over time.
Herman said Labor Department hearings this year on retirement issues confirmed what officials had suspected for some time: that many workers are ignorant about fundamental issues that can ultimately determine their financial security at retirement.
High on that list are the fees that plans charge to administer employee retirement accounts. After examining more than 300 plans at the hearings, department officials discovered that fees ranged from 0.2 percent of assets to more than 2 percent annually.
Just how much would this affect an employee’s retirement wealth?
Consider a hypothetical 35-year-old, Jane Saver, who has a $50,000 account and invests the bulk of her 401(k) balance in stocks that earn an average annual return of 10 percent, before accounting for fees. If her plan charges 0.2 percent, deducted from the return paid to Saver, she earns an average annual return of 9.8 percent. If Saver stops adding to her account and simply leaves her $50,000 alone to accumulate compound investment returns, she’ll have $352,152 at the end of 20 years.
However, if the 401(k) fees imposed on her account cut 2 percentage points off her annual return, leaving her with a net 8 percent on average, she’ll have just $246,340–a walloping $105,812 less. And the cost of the higher fees multiplies over longer periods.
After 30 years–at age 65–Saver’s 401(k) balance will have grown to $934,567 if she pays the low fees versus $546,786 if her plan charges the higher fees. The difference: $387,781.
It can be difficult to uncover just how much retirement plan fees cost you, because they can fall into several categories and be paid in several ways, Herman noted. Employees have to be fairly savvy to even know what questions to ask.
For instance, there can be three types of fees embedded in the structure of a 401(k) program. They boil down to administrative fees, which pay for record-keeping, legal and trust services; investment fees, which usually account for the largest portion of the fee total and are typically deducted from investment returns; and so-called “individual service” fees, which are charged to participants who take advantage of special services, such as the ability to borrow money out of the 401(k).
At some companies, the administrative fees are absorbed by the plan sponsor–i.e., the company that employs you. At others, the costs are all passed on to participants.
In addition, some investment options within the plan impose other charges, such as marketing fees imposed by “load” funds and insurance fees that are levied on those who choose variable annuity investment options offered through the 401(k).
Federal law requires employers to be prudent in choosing 401(k) investment options and to keep an eye on fees. However, there is no specific fee level that is considered a blatant violation of an employer’s fiduciary duty to offer reasonable options.
So while the Labor Department’s new booklet will help consumers determine fees, it won’t help trim the fat unless it can be established that the fees are excessive.
Still, since employee benefits departments–the company officials who pick pension plan administrators–are typically also affected by these decisions, they’re likely to pay attention if a disgruntled worker spells out just how much fees are costing each worker.
“One of the things we believe this project does is to give the employees knowledge,” Herman said. “In this instance, knowledge is clearly power.”
Consumers who want a free copy of the 19-page “A Look at 401(k) Plan Fees” can call 800-998-7542.
The Department of Labor has also published results of its study of 401(k) fees and expenses on its Web site: www.dol.gov
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Kathy Kristof is the author of “Kathy Kristof’s Complete Book of Dollars and Sense.” To contact her write: Kathy Kristof, c/o The Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053; or e-mail to: kathy.kristof @latimes.com)
