Despite the U.S. stock market's partial recovery after the lows of March 2009, Americans are still struggling to make up for the historic losses sustained in their 401(k) plans (see 401(k) Balances Up, but 'Lost Years' Are Still Troubling".) A key obstacle employees face as they save is high—and often hidden—401(k) plan fees, which can deprive them of thousands of hard-earned dollars over the course of their careers and hurt the timing and quality of their retirement.
"Plan fees are eating up thousands of dollars of employees' retirement savings without them even knowing it," says Alison Borland, retirement strategy leader at Hewitt Associates.
Monitoring 401(k) fees closely is a critical component in helping employees to reach their retirement goals. Even a small reduction in 401(k) plan fees can increase 401(k) participants' overall retirement earnings without requiring additional action on their behalf. Consider the example below.
Example 1. Typical Tim
A 30-year-old employee, "Typical Tim," makes $50,000 a year and has a plan balance of $50,000 with a typical salary deferral rate (6% of pay) and typical employee matching contribution (50% of the 6% deferral).
Typical Tim would have $115,000 more in savings at retirement simply because his 401(k) plan had fees of 0.6% vs. 0.9%, according to Hewitt Associates. This difference, over time, could help fill the gap caused by the market downturn.
Millions of employees who participate in 401(k) plans might be paying unnecessarily high fees because of how their company's service provider charges administrative fees, Borland notes. In many cases, service providers set these fees based on the amount of money (assets) in the plan, rather than through a fee-for-service model, where they charge fees on a per-participant basis. These asset-based fees increase as plan assets increase with stock market growth and contributions—even though the underlying costs these fees cover don't grow.
Because administrative fees usually are paid for by the employee and are deducted silently from account balances, this model can end up eroding their retirement savings significantly as their plan balances grow, as shown in the example below.
Example 2. Prudent Phyllis
When her 401(k) balance was $50,000, "Prudent Phyllis" had $50 per year deducted from her account for plan administrative expenses (0.1% of her account assets, which was in addition to the annual "expense ratio" fees charged by her individual investment funds).
Being steadfast about contributing to her 401(k), Phyllis saw her account balance increase to $150,000 in five years. Now, however, the plan will be drawing $150 per year in plan administrative fees from her account, even though no additional work or services are being provided to her.
Neither Phyllis nor her employer is aware of the magnitude of these fees, as service providers often don't disclose these costs adequately to plan sponsors and participants.
As concern over employees' retirement income adequacy levels continues to grow, Congress appears more likely to enact legislation that will require plan service providers to give plan sponsors and participants clearer descriptions of plan fees. "An apples-to-apples comparison of the fees in their 401(k) plan," Borland says, will enable employers and employees "to better understand the financial impact of these costs and, if necessary, take steps to reduce them."
Stephen Miller is an online editor/manager for SHRM.
White Paper: A Guide to Retirement Plan Fees & Expenses, Trucker Huss APC, February 2010
Turnover within Mutual Funds: The Hidden Retirement Plan Fee, SHRM Online Benefits Discipline, February 2010
401(k) Fee Disclosure Bill Draws Support, Opposition, SHRM Online Benefits Discipline, May 2009
401(k) Fees Matter: Tips for Reining Them In, SHRM Online Benefits Discipline, August 2007
Hide in Plain Sight: Finding Hidden Fees in 401(k) Plans, SHRM Online Benefits Discipline, February 2006
SHRM Online Benefits Discipline