On the heels of a government report suggesting that employers and employees alike don’t understand 4o1(k) fees comes a study from a research firm about how those often-hidden fees can a huge rip off.
In a publication titled The Retirement Savings Drain, left-leaning research, policy development and advocacy organization Demos claims that 401(k) administrative and trading fees can skim 30% of the top of your retirement nest egg, totaling about $155,000 for a two-income household.
The report summarizes how Demos arrived at this figure:
In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market. However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds.
Human nature probably explains in part how fund managers and brokers can get away with this. The average worker just doesn’t have the time to plow through all the complicated fine print and generally lets a 401(k), IRA, or other retirement account run on automatic pilot. Demos explains:
…these fees are often excessive and financial services companies can get away with charging higher-than-necessary fees for a number of reasons, namely: the savers’ lack of information, the inefficiency of financial markets and individualized investing, and the substantial costs—both in money and time—associated with switching between investment brokers.
Regardless of whether the alarming Demos calculations are accurate, US News & World Report offers some advice about how to avoid getting robbed by 401(k) fees, including:
As an initial matter, choose investments with very low expense ratios. While these expenses do not cover trading costs, keeping them as low as possible with low cost index funds will allow you to keep more of your investment returns for yourself.
Among several other recommendations, U.S. News also suggests talking to your HR representative about the company offering less expensive fund choices for your 401(k).
As The Inquisitr has previously reported, in this difficult recessionary economy, the vast majority of American workers have some concerns about whether or not they can grow their retirement savings. This makes it even more important that hidden, 401(k)-draining fees need to be revealed and minimized whenever possible.