By: Laura Walton AFC®
People are calling Jerry Schlichter, a consumer rights lawyer in St. Louis, the 401k Lone Ranger. He’s successfully sued several large employers for mishandling their 401k plans; Boeing is his current target. When I heard the story on NPR, it was the 28% difference that really got my attention.
Schlichter said, “A 1 percent difference in fees over a 35-year work career makes a 28 percent difference in the retirement assets available to that worker. So this is huge. It may mean that the employee has to extend their work another six or seven years instead of retiring when they wanted to or their lifestyle in retirement is severely hurt.”
Here’s how the Department of Labor’s publication on 401(k)s expresses it:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
We talk to clients about their 401k plans routinely and we find that they don’t know what fees they are paying because the fees aren’t easily found on their statements even though recent legislation requires they be shown. And, there are all kinds of fees…Plan Administration Fees (to administer the plan), Investment Fees (the operating expenses for the individual mutual funds, for example) and Individual Service Fees (for taking a loan against your 401k, etc.).
What can you do as an individual? You could talk to your HR Department about providing a lower cost plan with better fund choices – that will take time – but, for starters, you can look for funds within your plan that have lower operating expenses than others and, if you can build an appropriate allocation using them, do so. For example, I see plans that have index funds among their choices with operating costs that are as much as 1% less than a similar but actively managed fund. In this case, choose the index fund!
Bottom line, 401(k)s were designed to give individuals responsibility over their retirement savings. Unfortunately, that responsibility requires an understanding of a complicated account. So much so that clients often tell us they don’t bother to open their statements or, if they do, they don’t understand them.
Please know that the TCI Foundation is available to review your 401(k) choices…28% of your retirement savings is too much money to ignore.