Retirement plan fees eat up almost 1/3 of household savings

June 1, 2012 | Alex Stone

demos 401(k) feesRecent research shows the average American household could be paying as much as $155,000 in fees for retirement plans over their lifetime – a surprisingly large bite out of retirement savings.

Think that’s bad? Here’s the kicker: the majority of people paying these fees aren’t even aware of it. Although rules require funds and managers to disclose fees, an AARP survey found that 65 percent of 401(k) account-holders had no idea they were even paying fees, and 83 percent lacked even basic knowledge about the many fees and expenses that everyone with a 401(k) pays.

Those fees, as reported by Demos in The Retirement Savings Drain, can eat up nearly one-third of lifetime investment returns for the average household. The report goes on to point out that while some fees are necessary for effective management, current fee levels are excessive – and are costing workers hundreds of thousands of dollars in lost retirement income.

In conclusion, the report finds systemic problems in the 401(k)-style retirement system, which are highly individualized and largely inefficient. By contrast, defined benefit retirement plans – or ‘typical’ pension plans – are able to pool risk, and cost up to 46% less than the traditional 401(k).

Moving away from the 401(k)-style plan and toward a system that is able to pool risk and keep fees down will remove layers of complexity for employers and employees and lower costs. These changes would make retirement savings more affordable and more widely available.

Read the full report here: The Retirement Savings Drain: The Hidden & Excessive Costs of 401(k)s

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Posted in A Fair Deal at Work, Retirement Security, Retirement Security Accounts


  1. Winslow P. Kelpfroth says:

    Scott Burns’ column has been sounding this alarm for several years. The best way to fix it is to move your 401K plan to one of the low cost plans; I use Vanguard and Fidelity and keep the resources in index funds. They’ll move it into the new plan for you at no cost. Just tell them where your funds are currently located and sign some authorizations. This already has an effect. Our new company’s 401K plan has a number of funds with expense ratios of around 0.8% and I expect those rates will fall as money is moved to the lower cost funds. Make sure you tell your account manager why you’re moving your money.
    Defined benefit plans would be great except for the too common problem of unrealistic expectations. I still have some money from years ago in a municipal employee’s fund that does all their planning around an 8% real rate of return. This has been nonsense for at least a decade, maybe more. As many such retirement plans have done in several states, the plans will come back to the taxpayers to foot the bill for poor fiduciary decisions. Nothing good can come of pushing the fulfillment of unrealistic promises on the next generation.

    • Alex Stone says:

      Defined contribution retirement plans like 401(k)s often have excessively high fees because they’re highly individualized. Defined benefit plans, on the other hand, pool risk and create economies of scale which help keep fees low. Some defined benefit plans are indeed cutting their benchmark rates in response to volatility on Wall Street. For example, CalPERS recently cut their benchmark rate to 7.5%. But with 20-year returns averaging 8.8%, that assumption is hardly “nonsense”. In addition, defined benefit returns regularly outpace 401(k) returns: From 1995 through 2008, the median annual rate of return for defined benefit plans averaged 7.51% compared with 6.48% for 401(k) plans.

      Defined benefit plans offer security to workers in their retirement years – and that security cannot be replaced by 401(k)s, which have higher costs and are more volatile. Nothing good can come from a less security and financial certainty in retirement.

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