Generally speaking, I do posts on self-directed 401K and IRA options for folks. Many times I go on about the positive aspects of self-direction and do not mention salient facts and statistics about the financial world. Today, is a big exception. This post will surprise many, but it is based on factual data about the fees associated with 401K plans (not self-directed) and how, over a period of your lifetime, these fees can surpass $150,000…or, think of it this way…enough to buy a house or make a real estate investment. That is pretty shocking to say the least.
The genesis of this post was a result of a recent study conducted by Demos which showed how your 401K plan and the fees that are charged to it, will cost the average person $155,000 in fees over the life of the plan. Hard to believe, right? You should review the entire study as it is fairly complicated and dealing with compounded costs over one’s working and retirement years.
What is scary is that in many cases we are talking about fees that most people believe to be minimal….1%. But, the compounded affect over the years is staggering. In fact, while this post sums up some of the more staggering statistics from the study, one should review the entire Demos study. It shows how truly uninformed people are about such fees and how even with the new federal requirement for reporting such fees to employees will, in the end, probably have little true positive affect on truly educating folks on the costs associated with such plans.
Want one good example? First, as these fees are usually taken “off the top”, an individual really does not see them or gauge their true impact on their retirement savings. As the study reflects, for a two-income earner family, these fees can surpass $150,000 and consume up to one-third (yes, you heard that correctly), one-third of their investment returns. Oh, and if you are one of the more fortunate few (statistically speaking) and earn more than the average two-earner family used in the study? Then you can expect to see fees exceed $275,000 in your lifetime.
If that is not bad enough, companies can get away with charging high fees for reasons such as consumer lack of information, market inefficiency and excessive fees from changing from one broker to another. As one might expect, Demos is seeking for an entire reform of this country’s retirement system. Going into this holiday week celebrating this country’s independence, this may not rise to the reasons for the Tea Party, but it may give all of us reasons to draw parallels and comparisons. The system is that broken.
Other key findings to the study:
1) The average mutual funds returned 7%….BEFORE FEES. However, post fee returns averaged 4.5% which meant that over a third of the return received was consumed by fees.
2) Smaller 401K plans (under 100 employees) were charged fees of 1.29% vs. larger plans (over 10,000 employees) that had a 0.43% fee assessment. That is a large difference.
At the end of the day, what is one to do? Well, Bob Sullivan from The RedTape Chronicles suggests “…put all your 401(k) money in an index fund, which will have fees that are 70 percent to 90 percent lower than standard mutual funds.” While I understand the comment, what scares me is the word “all”. If one has the ability to do so, might it be wise for the individual to truly diversify (or self-direct) their investments across many asset classes. Isn’t that, at the end of day, true diversification?
Take some time to read the whole study. If you are a “head in the sand” type of person, you may not take the time. But, this is such a critical area of concern for all of us, that we should have a better education on this matter.
As always, nothing in this post is intended or should be taken as legal, tax, financial planning or investment advice. You should always consult your appropriate professional.