Building an Economy that Works for Everyone

401k fees eat money like moths in a sweater drawer – but not for much longer

401k-hidden-feesNew fee disclosure requirements for 401k plans are just around the corner – that’s good news for everyone who wants to save

You can’t see them easily, but chances are they’re eating away at the money you’ve been putting away for years. I’m talking about hidden fees in 401K plans, long the bane of good savers, which quietly eat away at people’s retirement accounts.

The fees look small – often no more than a percentage or two – but they add up big time. According to a recent AARP report, an employee investing $5,000 annually for 35 years at a 7% return without fees would accumulate about $469,000. But charge a 1.5% annual fee, and you’ve only got $345,000 over the same time period – a $124,000 loss! And the same report notes a recent survey in which 62% of respondents said did not know how much they were spending on 401k fees.

A recent report from the AARP found over 60% of 401k participants have no idea how much they’re paying in fees

Fortunately it’s about to get much harder to hide those fees. As of August 30, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires that all 401k plan participants (that is, employees with retirement accounts) have the opportunity to see what direct and indirect fees they’re being charged, so they can make a more informed decision about whether they’re overpaying for financial services.

401K plan fees often fall into three different categories – administration fees, investment fees and individual services fees. In many plans, some or all of the fees are bundled together and offered by one provider for a lump fee, which are often indistinguishable. The Dodd-Frank Act will essentially work to make these costs more transparent to the everyday employee.

And at least one business is using the new data to make it easier for people to look into their 401k fees. Sharebuilder 401K, a subsidiary of Capital One that provides custom-tailored retirement plans to small businesses, has launched a new website allowing employers to quickly calculate to see if the fees they and their employees are paying are too high. Sharebuilder has also advocated for an industry benchmark of less than one-percent for “all-in” employee fees.

These moves – both public and private – are strong steps towoard ensuring everyday employees investing for their retirement are charged reasonable and transparent rates, so working Americans can afford to save for a dignified and secure retirement.

~ By EOI Intern Bill Dow

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