New 401(k) plan disclosure rules from the U.S. Department of Labor won’t do much about fund fees that could–according a Demos report–rob one-third of your retirement savings because of the “tyranny” of compounding.
MSNBC columnist Bob Sullivan explains how the new rules that go into effect on July 1 work:
Soon, 401(k) statements will include a fact box — similar to the new info-boxes on credit card bills — that lists the fee rates (“expense ratios’) associated with fund selections and shows in dollars how much the investor paid.
Quoting the author of the Demos study, MSNBC claims the new fee disclosures won’t have much of a practical effect on how much fund managers or brokers take off the top.
The dollar amounts shown will reflect annual amounts, not the real harm from loss of compounding growth, he said. A 27-year-old with $10,000 invested in a mutual paying a 1 percent expense ratio will pay only about $100 in fees in a year, a number that will hardly inspire shopping around, [ Robert] Hiltonsmith figures. But that benign-sounding 1 percent annual fee is the source of most 401(k) folly. Compounded, it can result in loss of one-third of retirement savings, or more.
MSNBC’s Sullivan insists that 401(1) plan fees are a big rip-off:
If you had a dollar, and someone took one penny every year for 30 years, you’d only have 70 cents at the end. That’s what investing in a 401(k) mutual fund does to your money. These fee losses are obscured by additional contributions you make, and by market ups and downs – complex 401(k) statements are an obfuscator’s dream — but there’s no way around it: Fees are killing most investors’ returns.
Busy people tend to let their 401(k) plan run on almost automatic pilot, especially with administrative fees buried (at least until next week) in the fine print. The new disclosures may, however, encourage workers and employers to shop around for lower-cost mutual funds for their 401(k) plan.