Retirement continues to be a challenge for many Americans. Just saving up money to put into retirement is still a struggle, according to AARP’s 2017 Retirement Confidence Survey. Approximately 58 percent of workers and 44 percent of retirees surveyed felt they did not have enough saved to pay for long-term care. Other financial concerns were also on their minds, including how much they would need to cover expenses and unexpected costs.
And, while others have focused on maximizing their retirement accounts, they may be in for a shock when they see how much they are losing in fees tied to accounts like their 401(k). In fact, it may be considerably more than you’d think even if you believed your employer had selected the best plan available. In “The Retirement Savings Drain: The Hidden and Excessive Costs of 401(k)’s,” Robert Hiltonsmith reported that “over a lifetime, fees can cost a median-income two-earner family nearly $155,000 and consume nearly one-third of their investment returns.”
Taking a Financial Hit
Tom Zgainer, CEO and Founder of America’s Best 401(k), finds that most people don’t realize how much they are actually losing to retirement account fees. “One percent less in annual fees over an investment lifetime means 10 years longer in retirement. Therefore, you will run out of money if you don’t take action to reduce fees.”
To illustrate his point, Zgainer provided three examples of people who invested the same amount ($100,000) and earned the same return (8 percent) but put it into different retirement accounts that had different fee percentages (one, two, and three percent, respectively).
After a period of investment, the one percent fee account totaled $761,225 while the two percent fee account had $574,349, and the three percent fee account only reached $432,194. In reality, the person who only had one percent in fees would have money that would last 20 years longer than the person with the three percent fee account.
Further research has verified the financial hit that so many American workers are taking to their retirement accounts through 401(k) plan fees. For example, a 2015 study of 3,500 401(k) plans by a Yale law professor concluded that a large number of these plans focused on high-fee funds. Instead of putting money into these fee-heavy plans, the study recommended that young participants would fare better by invest on their own through an outside retirement account where there far fewer fees.
Additionally, research by the Pew Charitable Trusts, confirmed the impact of fees, noting “fees can affect savings directly, by reducing the amount saved, and indirectly, by lowering the amount available for compounding—a frequently overlooked but significant detriment to savings growth.” Since fees seem to be an inevitable part of the retirement account picture, many may feel it can’t be changed. But, it can.
Stopping the Fee Leak
In an interview with Tony Robbins on Facebook Live, Zgainer also noted that the gains in funds over the last few years have tended to disguise these excessive 401(k) account fees. “It’s not about how much has the plan grown over the last eight or nine years; it’s how much did we leave on the table and how do we not let history repeat itself?” It was only as far back as 2012 that retirement plan companies had to declare the amount and purpose of these fees.
Beyond just being aware about the impact of these fees now that there is an Employer Fee Disclosure rule in place, American workers now need to be vigilant in ensuring these fees don’t erode their hard-earned retirement money. The first challenge is to get through what can be a “disclosure” document that can be as long as 30 pages, according to Zgainer.
Despite listing fees throughout the document, workers still can’t understand what costs are involved. He has seen so many workers just give up after a few pages only to assume that it must be correct and there’s nothing they can do to understand what it means or do anything to change it.
That’s because the average investor — and sometimes even the savviest — doesn’t know what “required revenue fee” and “asset maintenance fee” actually mean. In many ways, these fee terms are just fancy names for commissions and revenue sharing agreements.
The first question is to ask, what is an appropriate amount of fees to pay for this retirement plan management and associated operational costs? Zgainer will say that no matter what amount of money is available to invest, no one should be one percent or higher in fees. And, if anyone tries to say that your company is too small and will only be able to reduce fees when they reach a high-dollar amount, don’t believe them.
If anything, the fees should be well under one percent. However, he’s seen fees as high as 3.25 percent.
A Fiduciary Responsibility
Part of the 2012 regulatory changes also involved making the employer responsible on a fiduciary level for the plan they selected for their employees. The purpose of the plan selected should always be for the sole benefit of participants.
Therefore, business owners or leadership are responsible for reviewing fee disclosure documents within 90 days of receipt. The same time period is also given to make changes to the plan that employer is providing to their employees. Not doing so can result in stiff fines plus it is disregarding the welfare of employees now and through their retirement.
Zgainer recommends that employees and employers undertake a fee disclosure assessment when they receive this disclosure document so they can determine if it is the most beneficial 401(k) plan for them in terms of the fee basis. Taking the time to be aware of what these fees mean and how unnecessary they are can result in a significantly better retirement position for everyone involved.