Saving for retirement could cost you $400k
April 17, 2014, 5:37 PM ET
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By Matthew Heimer
A worker who saves 10% of her salary in a 401(k) every year for 40 years is pretty much a model citizen in the Republic of Personal Financial Responsibility. But the price of citizenship is high: According to a study released this month by the Center for American Progress, a left-of-center think tank in Washington, D.C., the average 401(k) accountholder can expect to pay somewhere between $100,000 and $400,000 in mutual-fund expenses and administrative fees over the course of a lifetime.
Shutterstock.comPaying high fees? That’s your stack on the right.
Not that any saver will be directly presented with that six-figure bill, of course. That’s the point of the report—that these expenses gradually leach away a person’s nest egg without the investor realizing it. The Department of Labor now requires 401(k) plans to disclose more information about their costs, a move that some observers say has pressured financial-services providers to lower their fees; the center’s report calls for those rules to be tweaked to make disclosures even simpler and clearer.
The authors, Jennifer Erickson and David Madland, considered two hypothetical investors, one who started saving at age 25 while earning a salary of around $30,000 (the current median for workers age 25 to 34); one starting at 25 with a $75,000 salary. (That masters in electrical engineering: Already paying off.)
Each continued saving in their 401(k) until age 67, with employee and employer contributions totaling 10% of salary each year. The authors assumed that each would see their nominal income go up each year due to inflation and career advancement (perhaps a bit optimistic), with the increase slowing down after age 50; they also assumed that their savings would earn 6.8% a year, before fees and inflation.
Erickson and Madland then ran two fees-and-expenses scenario: one in which costs totaled 1% of assets, which the authors said was the nationwide average for 401(k)s; another in which they totaled 1.3% of assets annually, the average fee at small companies. (Recent research suggests these averages are on the high side, but not by a huge margin.)
The final price tags: By age 67, the average worker would have paid $138,336 in fees at the lower rate and $166,420 at the higher rate. For the higher income worker, those figures would be $340,147 and $409,202, respectively. In each case, the higher amount would represent at least 20% of the worker’s total 401(k) savings.
As a counter-example, the authors posited a retirement plan where fees and expenses amount to 0.25% a year (not out of reach, for a big plan that enjoyed economies of scale and relied on index funds). In this case, the average worker’s lifetime fees were $42,309 (about $1,000 per year of saving) and the higher-income worker paid $104,033.
Within many plans, of course, savers can choose between expensive and inexpensive funds; this report illustrates what a difference that choice can make. The authors’ broader conclusion: With more employees relying more heavily on their private savings to fund retirement, the difference between a high-cost plan and a low-cost plan could be, for some workers, the difference between running out of money or staying solvent.
April 17, 2014, 5:37 PM ET
SHARE:MORE EmailPrint
By Matthew Heimer
A worker who saves 10% of her salary in a 401(k) every year for 40 years is pretty much a model citizen in the Republic of Personal Financial Responsibility. But the price of citizenship is high: According to a study released this month by the Center for American Progress, a left-of-center think tank in Washington, D.C., the average 401(k) accountholder can expect to pay somewhere between $100,000 and $400,000 in mutual-fund expenses and administrative fees over the course of a lifetime.
Shutterstock.comPaying high fees? That’s your stack on the right.
Not that any saver will be directly presented with that six-figure bill, of course. That’s the point of the report—that these expenses gradually leach away a person’s nest egg without the investor realizing it. The Department of Labor now requires 401(k) plans to disclose more information about their costs, a move that some observers say has pressured financial-services providers to lower their fees; the center’s report calls for those rules to be tweaked to make disclosures even simpler and clearer.
The authors, Jennifer Erickson and David Madland, considered two hypothetical investors, one who started saving at age 25 while earning a salary of around $30,000 (the current median for workers age 25 to 34); one starting at 25 with a $75,000 salary. (That masters in electrical engineering: Already paying off.)
Each continued saving in their 401(k) until age 67, with employee and employer contributions totaling 10% of salary each year. The authors assumed that each would see their nominal income go up each year due to inflation and career advancement (perhaps a bit optimistic), with the increase slowing down after age 50; they also assumed that their savings would earn 6.8% a year, before fees and inflation.
Erickson and Madland then ran two fees-and-expenses scenario: one in which costs totaled 1% of assets, which the authors said was the nationwide average for 401(k)s; another in which they totaled 1.3% of assets annually, the average fee at small companies. (Recent research suggests these averages are on the high side, but not by a huge margin.)
The final price tags: By age 67, the average worker would have paid $138,336 in fees at the lower rate and $166,420 at the higher rate. For the higher income worker, those figures would be $340,147 and $409,202, respectively. In each case, the higher amount would represent at least 20% of the worker’s total 401(k) savings.
As a counter-example, the authors posited a retirement plan where fees and expenses amount to 0.25% a year (not out of reach, for a big plan that enjoyed economies of scale and relied on index funds). In this case, the average worker’s lifetime fees were $42,309 (about $1,000 per year of saving) and the higher-income worker paid $104,033.
Within many plans, of course, savers can choose between expensive and inexpensive funds; this report illustrates what a difference that choice can make. The authors’ broader conclusion: With more employees relying more heavily on their private savings to fund retirement, the difference between a high-cost plan and a low-cost plan could be, for some workers, the difference between running out of money or staying solvent.
