That’s the sound of your money slowly being eroded away by fees. Fees associated with 4o1(k) plans have come in for some discussion of late. The Labor Department proposed new rules that would require better disclosure of fees and conflicts of interest to employers sponsoring 401 (k)s.
Left unaddressed is the question of what employees know about the fees being charged to their retirement plans. A July report from the Transamerica Center for Retirement Savings finds that 75% of large company employees and 72% of small company employees either think their retirement savings is not affected by fees or are not sure if fees are charged. (Among that study’s other scary findings: 51% of those surveyed “guess” what they’ll need to save for retirement.)
Of course fees are charged, and a recent survey from Deloitte shows small company employees are being charged much higher fees on average than their big company counterparts. Companies with fewer than 100 employees have average all-in 401(k) costs of 2.03% of plan assets, while companies with more than 10,000 employees have costs of 0.48% In a writeup of the study, Michael Zhuong shows what the difference in fees adds up to.
Let’s assume an employee of a small business puts $10,000 into his 401k plan each year, and the portfolio grows at a rate of 7.5% before costs. If the plan fee is 2%, his 401k plan will grow to $511k in 25 years; if the plan fee is 0.5%, his 401k asset will grow to $632k.
$632k – $511k = $121k > 12x$10k.
The employee under the high-cost plan literally gives up 12 years of his contributions!