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Sunday, June 5, 2011

401k Fees

(Source: Bloomberg)

Ron Lieber of the New York Times has an excellent piece on 401k fees and the upcoming requirement that costs be revealed to plan participants. For those who require a bit of titillation on this subject, Mr. Lieber's article has a murder in it. Not exactly a Robert B. Parker novel but still...

He points out an example of the impact of fees on retirement balances (i.e., the "nest egg") put out by the Labor Department.

The Labor Department looks at a person who will retire in 35 years with a balance today of $25,000. Assume a 7% average annualized return and that plan expenses amount to 0.5%/year. At the end of 35 years, the plan participant will have a nest egg of $227,000. If, instead, fees are 1.5%, the nest egg will end up at $163,000--a 28% reduction!

BrightScope has been compiling 401k plan data enabling participants to assess how their plans compare to similar plans. At the BrightScope website, participants can easily get this information at no cost by just typing in their company name.

BrightScope finds that larger plans pay considerably less and that plans with less than $10 million take an average 1.90% out of the bottom line. As an aside - smaller plans, with less than 100 employees, can significantly reduce these fees by offering a SIMPLE IRA to their employees.

In 2012, fund providers will be required to reveal the detail on these fees - a huge step in the right direction.

2 comments:

  1. I have so many of my coworkers who have no clue how these 'small' percentage points affect the outcome! (My plan is with JD Edwards who is notorious for shady fees and expensive funds).

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  2. Very good observation, thank you.

    I am still honestly puzzled with the average 7% figure...it is like measuring average temperature in a hospital - some are cold, some a hot, but in overall - not so bad.

    Where are the examples of portfolios 10-15 years old with the returns of 7% a year. Do these actually exist?

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