Ron Lieber at the New York Times recently came out with an article that explores one of the most important problems with 401(k) plans: they can be expensive and plan participants have no idea how much their plans are costing them.
There are costs associated with with running a 401(k) plan–administrative costs for the plan, for example, are distinct and in addition to the expenses associated with the individual funds within the plan. These costs are sometimes added to the fund’s expense ratio in the creation of a share class specifically designed for retirement plans. These are usually “R” class shares.
The New York Timesarticle cites research by BrightScope, a firm that compiles data on 401(k) plan costs, that shows … that the average all-in costs for 401(k) plans with less than $10 Million in assets is a 1.9% per year. These costs get lower as the size of the plan increases. For plans with between $10 Million and $100 Million in assets, the average all-in cost is 1.36%.
Plan Costs Add Up Over a Lifetime
While there are a variety of ways to determine the impacts of expenses on long-term accumulation of wealth, Lieber cites a Department of Labor study that suggests that going from 0.5% in total expense to %1.5% in total expense can result in a reduction in lifetime wealth accumulation of 28%. The difference of 1% per year sounds small–especially in light of market returns that have been in the double digits (both up and down) in recent years–but compounding these effects over a working lifetime leads to a major impact.
It is unclear what the goal should be for 401(k) plans in terms of total expenses, but more attention and transparency should certainly help in establishing the goals, as well as giving employers (the plan sponsors) better information for finding the best plan 401(k) plan for their employees.
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