Did that catch your attention? Good it should have.
I missed this article last June in NBC News, Your family is probably losing $155K from 401(k) plan, and why new rules won't help. (And I thought I used long titles.)
The $155,000 comes from this study by Demos. The culprit? Investing fees.
As the NBC News article points out, "Doing the math to determine real investing costs from fees is tricky. It involves a long series of assumptions on factors so individualized that no 401(k) projection model is easily generalized. Instead, the Demos study and others like it are merely 'for instance ...' examples." To be fair to Demos, they did their best to create and average couple: people earning average income, contributing the average amount to a 401k, having average growth, over an average 40 year career, etc..
So that's where the "probably" comes from in the NBC article. No one really knows how much the investing fees are going to cost you and everyone is different. However, even conservative estimates from Wall Street sources in that article pin it at $20,000.
This infographic from MoneyNing on 401k fees gives some examples from various companies of the best and the worst. The best 401k plan comes from GE at a price of $45,998, while the worst is Avery Dennison at a whopping $355,057 in fees over a career. That Avery Dennison total covers more than 5 years of the example employee's salary. (Side Note: If you clicked through and wondered why I didn't include the very lowest number in the infographic it is because it incorrectly categorizes the military's Thrift Savings Plan (TSP) as a 401k . It is essentially the same for the participants, but technically it is different. The TSP is one of the better military perks with a miniscule $6,674 fee in the example.)
While there's a huge difference between $355,057, $155,000, and $20,000, none of the numbers should be of consolation to the average person.
We, Americans on average, don't have that much in our 401k accounts. The NBC article quoted Fidelity as saying that the average person has $75,000 in their 401k and that those close to retirement have an average of $100,000. The Center for Retirement Research two years ago pinned it at $149,400. As I discovered last year even People Making a Lot of Money Still Don’t Have Enough to Retire. That article pointed out that those who make in the 75th percentile only have a median of $52,000 in their retirement accounts (all retirement accounts, not just 401ks)... and those people age 50+ who had time to save .
However you slice and dice the numbers the fees, even at the lowest estimates are very significant compared to the savings.
So what can you do about the investing fees? The answer is not much.
Most 401ks have limited options and people are locked into choosing high fee fund vs. high fee fund. Perhaps I'm being a little too harsh on the fund fees. I should say that the fees are less than optimal. If you had the ability to invest the money however you wanted to, you could choose some very low fee Vanguard funds... often with a cost of 1/10th of a percent a year. In contrast, 401ks can average around 1% in fees. That probably doesn't sound like much, but years of investment compounding make that number mean a lot.
The two actions I recommend are:
- Look for funds with low expense ratios in your 401k. Typically these are index funds rather than managed ones.
- When you leave your job, you'll will probably have the opportunity to rollover your 401k into an IRA. Do it, because then you'll be able to choose options with low fees.
If there's one thing I don't recommend, it's waiting to contribute to your 401k. You don't have to be median if you are contributing a big number consistently. My guess is that many people are put off investing in their 401ks because they've got other financial priorities going on (maybe paying off credit card bills) or aren't living within their means. You are also not a "for instance", and do have some ability to limit the impact.
Contributions to my 401k have been one of my most power weapons in my fight for financial freedom.
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