While many Americans look forward to their retirement years, saving for this time period can bring a lot of stress. A majority of workers participating in a 2017 AARP survey said they felt that they did not have enough saved for the various expenses, both expected and unexpected, that come with retirement. Part of this problem may relate to the hidden fees associated with retirement accounts, especially 401(k)s.
Often, people do not even know they are paying fees on their 401k, or have little choice in paying them, as their plan is selected by their employer. According to financial expert Robert Hiltonsmith, these fees can cost the average two-earner family more than $150,000 over a lifetime, an amount that accounts for nearly a third of all investment returns.
Understanding the Incredible Impact of Fees on Retirement Savings
Most people saving for retirement do not understand the impact that fees can have on their accounts. In fact, paying a single percent less in fees for an investment over the course of a lifetime can translate to enough money for an additional 10 years of retirement.
Consider three people who all invest $100,000 and achieve a rate of return of 8 percent. One person invests in an account with 1-percent fees and eventually achieves a total of $761,000. Another puts their $100k into an account with 2-percent fees. During the same time interval, this account will only grow to $574,000. The third person invests in an account with 3-percent fees. This account ends with $432,000. These figures demonstrate how seemingly small increases in fees can cut into overall savings.
In 2015 a law professor at Yale published a study concluding that a surprising number of 401(k) plans focus on high-fee funds, and ultimately recommended that employees pay close attention to the fees they pay.
Instead of putting money into plans with high fees, employees may be better off investing in a retirement account outside of their employers’ that will conserve a much higher percentage of their investment for the future. Pew Charitable Trusts has also researched this issue, noting that fees lower the amount of money available for compounding and thus have a reverberating effect on growth through the life of the investment. Unfortunately, many people think that fees are an inevitable part of saving for retirement, but this is not the case.
Pushing through the Confusing Language of Fee Disclosures
Often, 401(k) plans bury the nature and number of fees in pages upon pages of statements and then use undecipherable names to describe them. Since 2012, retirement plan companies have been required to declare the amount and purpose of fees, but that does not mean they do not try to confuse the average investor. Even savvy investors may feel lost in a 30-page disclosure document designed to discourage people from asking questions. Phrases like “asset maintenance fee” and “required revenue fee” seem legitimate, but they actually just refer to revenue sharing and commissions.
To determine if you are paying too much in fees, you will first need to know what an appropriate amount is. In general, fees should be less than 1 percent, but many finance professionals note that they have seen fees as high as 3.25 percent. Some plan managers will try to justify a higher rate by saying that a small company needs to pay higher fees until they grow larger—this is not the case. Ideally, it should be under 1 percent, regardless of the size of the company.
Viewing Employers as a Key Partner in Fee Negotiations
The regulatory changes that took place in 2012 made employers responsible for the plans they select for employees on a fiduciary level. Employers have a duty to select plans solely for the benefit of their employees and are required to review fee disclosure documents within 90 days of receiving them. During this time period, it is possible to make changes to the plan. Company owners and managers can actually face rather significant fines if they do not review the disclosure since it is considered disregard for the welfare of employees both now and in the future. In other words, employees are not alone when it comes to negotiating for better fee structures and should view their employers as partners in this struggle.
Employees should advocate for a joint disclosure assessment with their managers to make sure that the plan is the best for the future. When people take the time to learn what the fees mean and how they may be unnecessary, they can argue for a fairer structure and ultimately put everyone in a better position for retirement.