How Much is Your 401(k) Costing You?

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How Much is Your 401(k) Costing You?

By JLP | April 3, 2007

On March 14, the Wall Street Journal featured an article by Eleanor Laise titled What Is Your 401(k) Costing You?(free) Most people (myself included) have no idea how much their 401(k) plan provider is charging them to manage their 401(k). Why? Because many of the fees aren’t disclosed.

I realize that 401(k) plan administration is expensive. However, I don’t see why plan providers and administrators can’t provide details on plan costs. I found the excuses for the lack of disclosure laughable:

If participants can easily compare the costs, some in the industry argue, employees might plow all their money into cheap but low-return investment options like a money-market fund. Others say that if employees saw all plan expenses, they might not want to participate at all, which would be a “worst-case scenario,” says Pamela Hess, director of retirement research at Hewitt Associates.

Even if that were true, we’re probably talking about people who already put all their money in money market funds or don’t participate at all. What employees need is education along with full disclosure.

Fees Do Matter

Take a look at the graphic I put together illustrating the impact of fees on a 401(k) account:

As you can see, fees do matter. It’s amazing that a 2% fee can wipe away over 25% of a retirement plan balance.

Now it’s your turn to weigh in. Do you think plan providers and administrators should provide full disclosure on 401(k) plan fees?

Topics: 401(k), Investing |

Comments to “How Much is Your 401(k) Costing You?”

Kurt Says:
April 3rd, 2007 at 10:40 am

I know exactly how much my manager is charging me. It comes out to 0.015% per annum. They have to pay the bills somehow and I don’t really mind the small deduction. The ones you show above sound crazy high.

JLP Says:
April 3rd, 2007 at 10:48 am

Kurt,

Your’s seems crazy low to me.

I understand that they have to pay bills. I’m not against that at all. What I am saying is that there needs to be some transparency in fees.

plonkee Says:
April 3rd, 2007 at 11:10 am

Yes.

Over here, in the UK we have occupational money purchase pensions which are essentially the same thing as 401(k) plans. The details of mine say that a 0.5% fee is charged, its not clear from the wording if this is the only fee though.

HC Says:
April 3rd, 2007 at 11:21 am

I’m very lucky; my plan has exceptionally low fees (0.06%, yes, 6 basis points). The tradeoff is that our fund choices are limited to a few very broad index trackers. I think it’s worth it.

Dylan Says:
April 3rd, 2007 at 12:06 pm

This is a huge issue. Many plan sponsors don’t even understand what their plans fees are. There are so many levels of fees, soft dollar agreements, revenue sharing, and administrator rebates that all come out of the participants’ returns. Also some of the 401(k) providers look sponsors in to their plans with crazy high exit fees that were written in 6 point font on page 96 of the plan disclosure document in some combination of legalese and calculous.

If you think you are paying 0.015% for something other than a money market fund (still very low) in your 401(k), dig deeper because you are likely paying more someware.

Kurt Says:
April 3rd, 2007 at 12:26 pm

JLP, I have the statement right in front of me where they detail what they take out for “administrative fees.” All I’m saying is that in my case, this is a complete non issue as I have both transparency and low fees. Anyone with Fidelity running their 401(k) can likely corroborate my figures.

Kurt Says:
April 3rd, 2007 at 12:28 pm

“If you think you are paying 0.015% for something other than a money market fund (still very low) in your 401(k), dig deeper because you are likely paying more someware (sic).”

Of course there are going to be fees layered onto the funds themselves, but as far as administrative fees go, that’s it. Again, anyone with Fidelity running the plan can see the figures in their statements.

Kurt Says:
April 3rd, 2007 at 12:43 pm

FYI, if you read the article, you’ll see that they are talking about all-in fees (sales charges, fund expenses, etc) not administrative fees which this post is talking about. For instance, the article talks about moving from actively managed funds to ETF to save on expenses. This will save the investors money (depending on the relative costs), but it will not reduce the administrative burden to the administrator. I think you have your signals crossed.

JLP Says:
April 3rd, 2007 at 12:51 pm

Kurt,

I’m talking about ALL fees associated with a 401(k) plan. The article says this:

“401(k) plans aren’t required to make clear how much participants are being charged in fees. And there can be a lot of them, including charges to cover independent audits; tracking and maintaining accounts; advisory services; as well as help lines, and of course the basic expense of managing funds in a plan.”

Kurt Says:
April 3rd, 2007 at 12:58 pm

JLP, but you say:

“how much their 401(k) plan provider is charging them to manage their 401(k)”

401(k) providers charge a set of fees to run the program and the fund providers charge a set of fees to run the funds. There is a huge difference there and you are not portraying it correctly. Managing a 401(k) is pretty simple, low cost stuff. Managing active mutual funds is much different. Could you correct your post? Thanks.

sam Says:
April 3rd, 2007 at 3:10 pm

I am fortunate to be in the Federal Thrift Savings Plan. According to their web page http://www.tsp.gov, the current (2006) expense ratio is 0.03%. Having a couple of million participants must give some economies of scale. Needless to say, I’m maxed out on contributions.

Bob Says:
April 3rd, 2007 at 4:34 pm

JLP, Do you know if I can rollover my 401K from my current employer plan to Rollover IRA.I am not happy with my current plan as they don’t offer any match and moreover the fees are quite high.Infact I have stopped contributing but am still getting charged these fees.Any advice.

Kurt Says:
April 3rd, 2007 at 6:16 pm

“I am fortunate to be in the Federal Thrift Savings Plan. According to their web page http://www.tsp.gov, the current (2006) expense ratio is 0.03%. Having a couple of million participants must give some economies of scale. Needless to say, I’m maxed out on contributions.”
That’s impressive. Probably a combination of economics of scale, no marketing expenses and virtually no turnover. Maybe the gov’t picks up some of the admin costs as well? Either way, good deal.

Bobby Says:
April 3rd, 2007 at 8:39 pm

I agree that there should be full disclosure of all fees for 401(k)s and I am trying to find out what our fees are. Unable to locate the info online so far.

Kurt Says:
April 4th, 2007 at 8:10 am

Bobby, it isn’t easy, but the biggest portion of the expenses has nothing to do with the 401(k) itself but rather of the funds within it. Check out which funds you hold, and then use a place like finance.yahoo.com to determine the expense ratios on those funds. Take on a few basis points (1.5 bps in my case) and that will give you a rough approximation. But again, the funds are the big culprit here, not the 401(k).

tinyhands Says:
April 4th, 2007 at 9:06 am

@Bob,
They’re going to charge you those fees as long as you have money in the plan. Usually you cannot withdraw contributions and roll them into a Rollover IRA until after you leave the company. Check your plan specifics. But unless the fees are extremely excessive, a 401k is probably still a good tax-deferred retirement savings strategy simply for the amount that you can contribute. Since your employer already offers a qualified plan, your options are pretty limited. It is PROBABLY in your best interest to max out your Roth IRA first, and then contribute as much as you can afford to the 401k. Your mileage may vary.

Otherwise, your next best (or simultaneous) course of action is to lobby your employer to switch plan administrators.

Foobarista Says:
April 4th, 2007 at 1:16 pm

One of the dirty secrets of 401K plans is the funds in the plan drive the cost to the employer. A bunch of high-cost garbage in the plan means fat commissions to the 401K administrator, and they will charge the employer less for these. Plans with lower-cost - and lower commission - funds make less money for the 401K administrator and cost the employer more.

Also, the bigger the plan, the cheaper it is to administer on a per-employee basis. And many better administrators like Vanguard won’t touch employer 401K plans unless the plan pool is over $1M.

This is why small company 401Ks tend to be bad, unless the management makes it a point to find a good one and pay for it. And, sometimes, they don’t know better - most little companies aren’t in the finance biz.

Free Money Finance Says:
April 6th, 2007 at 4:19 am

Star Money Articles for the Week of April 2

Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: MightyBargainHunter tells of a man who bought a house by selling coins with errors. Five Cent Nickel lists the Roth IRA income limits for 2007. Blueprint

Brigil Says:
April 6th, 2007 at 7:44 am

This issue burns me up! My wife’s 401(k) has a sorry collection of choices, all with moderately high expenses (avg=1.1%). I really want to take the money out and put it in index funds/ETFs–but the company matches 50% on the first 6%, and that’s too good to pass up.

Shadox Says:
April 7th, 2007 at 12:28 am

This is an excellent post. Thank you.

I am a member of the management committee of my company’s 401(k). I got into this role a few months ago and the first thing I tried to figure out were the costs. Even with full access to the information and asking some direct questions of our providers this is proving to be pretty tough.

Our current provider is ING. Not only do they charge us outrageous expense ratios (1% - 2%) until very recently they also charged us “wrap charges” to the tune of an additional 0.3% to 1%… it’s crazy. Because of our inquiries they now dropped these wrap charges. However, I am still advocating for our company to switch providers.

I am telling you, 401(k) expenses are a scandel. These guys are draining the retirement assets of an entire generation of American workers. This is something Congress should intervene with and address immediately.

Dreamer Says:
April 26th, 2007 at 10:01 pm

Hi JLP,

I’ve been a passive reader of your blogs for quite sometime and i’ve a learnt a lot abt finance.
I am indian student in F1 visa status. I recently got a job and i plan to work for around 5 yrs in H1B status before i go back to india. I dont wanna settle down in the US till my retirement. My company offers 401(k). For the first 3% they match every dollar. next 2% they match 50 cents a dollar. I dont want to lose the free money from my employer. Is it worth investing in 401(k) even after knowing that i would be taking the money before retirement and will be paying the tax and penalty when i withdraw it. I wanna know if i could profit, even after taxes and penalty, from the free money that my employer matches. My gross salary is 78k and i fall under 28% tax bracket.

Jim Bigham Says:
May 16th, 2007 at 2:32 pm

I love your quote from Hewitt. They INVENTED the concept of sub-transfer agent fees year ago. These are the payments made by funds to the TPA that are gererally hidden from sponsor view and ALWAYS hidden from participants. HILARIOUS!

I read one of the Hewitt booklets published on their web site about managing plan expenses. I couldn’t find sub TAs or revenue sharing payments anywhere in that document. No surprise.

Cheers,

Jim Bigham

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How Much is Your 401(k) Costing You?