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The Takeaway: 401(k) Fees Reduce Savings by 30 Percent, Says Study

Hmmm ... 401(k) plans can help you save money for retirement, but they many also cost you more than you realize. According to a new study from research firm Demos, the average American couple pay nearly $155,000 in 401(k) fees in the course of building up their proverbial nest egg; wealthier couples could pay nearly $278,000. These fees can reduce 401(k) savings by an average of 30 percent.

Beginning in July, the U.S. Department of Labor will begin requiring disclosure of all 401(k) plan fees. But as of right now, many workers don't understand the hidden fees their plans are charging-and  neither do employers, according to a recent GAO report.

Common 401(k) plan fees include:

  • Administrative fees: Generally ranging from 0.2 to 0.4 percent of your account assets, according to Consumer Reports, these fees go to things like record-keeping and processing transactions.
  • Investment management fees: Typically .5 to 1 percent of assets, these fees go to pay the salaries of those responsible for a mutual fund's investments.
  • Marketing or 12b-1 fees: Up to a maximum 1 percent, these fees cover the costs of advertising and selling the mutual funds in the plan.

Together, these three types of fees are known as the "expense ratio," and listed in both the plan's summary documents and the individual prospectus of each mutual fund. A fourth expense, known as trading fees, however, "are nearly completely hidden from retirement savers," said Demos researcher Robert Hiltonsmith.

The mutual fund industry disputes the Demos analysis. According to an industry trade group, the average person pays just $248 a year in 401(k) fees, which would cost the average dual-income household around $20,000 over four decades of working.

There is some good news: new tools are available to help you do your own research. If you work for a large employer, CNN Money offers a free tool that shows the impact of the fees in your employer's plan. If your employer is not in CNN Money's database, you could use a tool like just to calculate the impact that a couple of percentage points in fees makes over your lifetime.

Thursday Quick Hits:

  • The tough job market has a lot of older Americans-many who lost jobs during the downturn but are too young to retire-learning new trades, Reuters reports. Yet even with new skills, older workers are re-entering the labor market at very low salaries, often just above minimum wage.
  • A judge in New Jersey has ruled that the state can withhold cost-of-living adjustments for retired public employees with state pensions until the state retirement systems reach targeted funding levels.
  • The U.S. Centers for Medicare & Medicaid Services said it aims to reduce the use of powerful antipsychotic drugs in nursing home residents with dementia.
  • And ... American credit card debt is down, but this isn't necessarily good news. A  decrease in credit card debt does not indicate heightened financial literacy, a recovering job market or smarter spending habits, Forbes' Tim Chen writes.  It means the situation was beyond repair and required an artificial reduction.



Photo: CJ Burton/Corbis

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