The Government Accounting office estimated that excessive investment fees of 1% will cost you 17% in accumulated balance. The Department of Labor website offers the following primer on why a participant and the fiduciary responsible for oversight of the investment fees paid by participants should care. “Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.”1
Investment fees and 408 (b) (2)
The Department of Labor’s 408(b) (2) was intended to help uncover hidden plan costs. I have not met a plan sponsor that has looked at their disclosure. However, ensuring that the fees paid are fair and reasonable is a fiduciary responsibility. I have talked to employers who see the administrative cost born by the company and think that is it. What the company pays may only be a fraction of the administrative costs. Administrative and plan consulting fees may be paid by the plan sponsor or participant. Investment fees are always paid by participants (deducted from plan assets).If by chance they do pay for these costs, there are still investment costs and plan consulting (broker or advisor) costs.
Investment fees and 401(k) plan fees
The largest component of 401(k) plan fees is associated with investment fees. These fees generally are assessed as a percentage of assets invested. These fees pay for the portfolio manager’s salary, research, trading, etc. If you have a broker, the commission that the broker receives is also part of that cost. Typically the total cost is expressed as an expense ratio. Some strategies have lower costs than others because they do not try to beat the market. Instead they seek to replicate the return of some type of index, such as the S & P 500. This reduces the cost of the investment and the risk that the portfolio manager does not beat the return of the index, benchmark that the manager tries to beat.
Demos2 reported on fees in “The Retirement Savings Drain, The Hidden and Excessive Costs of 401(k)s”. “American households will pay, on average, nearly $155,000 over the course of their lifetime in effective total fees. Investment fees depend on your individual circumstances.” The GAO and Demos are both trying to tell you that fees are an important issue impacting your retirement.
Investment fees and managing your fiduciary responsibility
If you have not done a fee comparison within the last 12 months, STOP and find a qualified retirement plan specialist help you. That person or entity should have access to an independent tool to help you assess. The comparison should compare your plan to similar size plans. Larger plans typically can get better pricing because they have greater purchasing power. While smaller companies are likely to have higher costs, their employees and highly compensated staff may get more personalized service. In addition to the tools, your specialist should be able to help you understand the data. The answer is not just one of cost. It is about value. Are you getting services for what you pay? I strongly believe that means that the results of your employees should be evaluated. Are they saving more? Are their portfolios on track with their goals? These specialists likely are either discretionary trustee or an independent, professional fiduciary. They have credentials such as Accredited Investment Fiduciary® and Professional Plan Consultant™. Need help? Please call James Brewer, 773-699-4756, email james.brewer@lpl.com or use our contact form.
(1) United States Government Accountability Office, PRIVATE PENSIONS Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees, November 2006
(2) The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
(3) Dēmos is a non-partisan public policy research and advocacy organization founded in 2000. Dēmos works with policymakers around the country in pursuit of four overarching goals—a more equitable economy with widely shared prosperity and opportunity; a vibrant and inclusive democracy with high levels of voting and civic engagement; an empowered public sector that works for the common good; and responsible U.S. engagement in an interdependent world.
(4) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(5) This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
