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Financial Planning

The One Fee Trap You Can Totally Avoid (Hint: It Has to Do With Your 401k)

I had a sinking feeling reading more bad news on retirement. We keep getting nagged to save more (Americans being poorly prepared for the future and all) – so we do and then we find out our savings are being drained by excessive fees. Argh! Hello brick wall, I think you’ve met my head before.

Betterment Editors

By Betterment Editors
Betterment  |  Published: June 11, 2012

I had a sinking feeling reading more bad news on retirement. We keep getting nagged to save more (Americans being poorly prepared for the future and all) – so we do and then we find out our savings are being drained by excessive fees. Argh! Hello brick wall, I think you’ve met my head before.

Here’s what I’ve been reading (stay with me – it’s not all bad news!).

What’s the Cost?

A recent report by research organization, Demos, reveals a scary stat on 401(k) fees: The average American couple could pay nearly $155,000 in fees for their 401(k) plans over their careers (and more like $278,000 in fees for a higher-earning couple).

To put this into perspective, The LA Times estimates the cost at 30% of the average nest egg, while an article in Forbes points out that you could buy a home for that amount.

To make matters worse, 30% of Americans changing jobs leave a retirement account behind rather than rolling it over (according to Harris Interactive survey commissioned by ING DIRECT). These “forgotten” 401(k)s are subject to higher fees once an employer relinquishes responsibility (although most employees pay 90% of the costs already according to Forbes).

Note: The mutual fund industry and some independent experts disputed the findings, pointing to a study that showed the cost to be more like $20,000 over the course of a career. Forbes, however, claims this data did not take actual trading charges within the mutual funds into account.

Where do the fees come from?

According to the report:

  • The median expense ratio of mutual funds in 401(k) plans was 1.27 percent in 2010.
  • Trading costs vary from year to year, but have been estimated to average approximately 1.2 percent a year as well.
  • Smaller 401(k) plans have higher average fees than larger ones.

What Can You Do?

Until recently, mutual funds have been notoriously opaque about how much is being charged for trading or administering an account. As of July 2012, The U.S. Labor Department will begin requiring extensive disclosure of all 401(k) charges. This is good news.

If your employer offers to match your contributions you should take it (free money!) but ask that they explain the costs associated with the account. Don’t be afraid to ask questions: a study by the Government Accountability Office last month found that many employers did not understand the fees that 401(k) providers charge their workers (LA Times). Find out if you are being charged trading fees in addition to management fees – this can double the cost and is not necessary.

If you change jobs, don’t forget to rollover your 401(k) into a low-fee IRA. It will help keep costs down (plus I find consolidating accounts is far easier to manage).

When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. The information on this page is being provided for general informational purposes and is not intended to be an individualized recommendation that you take any particular action.

Factors that you should consider in evaluating a potential rollover include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account and consult tax and other advisors with any questions about your personal situation.

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