Fees Can Sap Over $100,000 From Your 401(k) Plan

By Carole Fleck, April 17, 2014 10:58 AM

Some 52 million Americans rely on their 401(k) savings plans as a key part of their retirement. Now, the Washington-based Center for American Progress says in a new study that high investment fees could cost the typical worker $100,000 or more over the course of a four-decade career. That may force some to stay on the job at least three years longer than they'd planned just to make up for that loss.

Given the fact that many older workers are having a difficult time staying in the work force - with 47 percent of retirees in 2013 having retired earlier than planned - working longer to cover retirement fees may not even be an option, the study said. At a time when the nation's current personal savings rate is less than half of what it was 30 years ago, the strain to save more to cover fees is a problem.

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For a two-income household, fees could erase as much as $250,000 from their retirement savings over a lifetime, according to the study by the advocacy organization.

U.S. workers' 401(k) plans charge fees of about 1 percent of assets managed. And participants at small businesses tend to pay higher fees - on average 1.32 percent, according to a 2011 study cited in the new report.

Many workers don't know how much they're paying in fees, the study said, even though they get annual disclosures detailing those costs and how those fees may reduce savings over time. Many also don't know whether lower-cost fund alternatives are available in their plan.

Here's how the difference in fees can affect workers' savings, according to an example used in the study: A 25-year-old earning $30,502 a year saves 10 percent of her salary annually (including a 5 percent match by her employer) in a retirement plan. Her investment return averaged 6.8 percent a year. Her salary rose 3.6 percent a year.

By the time she retired at age 67, when she'd be able to collect her full Social Security benefit:

A 1 percent fee would have drained $138,336 from her 401(k) plan.

A 1.3 percent fee would cost almost $166,420.

For a worker in a similar situation earning $75,000 a year at age 25, a 1 percent fee would've drained a whopping $340,147 from her account over the course of her career, or $409,202 assuming a 1.3 percent fee.

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"All retirement funds should have a clear, understandable label that provides consumers with relevant, concise, and accessible information about fees," the study's authors said. "Improved fee disclosure could help individuals make better financial decisions . . . and could encourage firms to provide lower-cost options."

Some financial planners say workers should save up to 11 times their annual salary - or $550,000 if you're earning $50,000 a year - to maintain a similar lifestyle after they stop working. AARP retirement tools can help you plan and calculate your retirement needs.