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