FREE NEWSLETTER

401(k)s Aren’t Free

Greg Spears

DO YOU KNOW WHAT you pay for your 401(k)? Over time, even seemingly small charges can take a big bite out of your retirement savings.

That’s why a new Government Accountability Office (GAO) report is so surprising. Fully 41% of people surveyed think their 401(k) is free. And I’ve got a unicorn tethered in my backyard. Not only are they incorrect, but also it suggests that those required fee disclosure documents from plan providers are written in ways investors just don’t understand.

Why might so many people think their 401(k) is free? Unlike diners in a restaurant, 401(k) investors are never presented with a bill. Instead, 401(k) fees are silently subtracted from their account balance. That’s why the government insists that plan providers tell investors, ahead of time, all the fees they may pay. Yet, when shown real-life examples of fee disclosures, 45% of investors couldn’t fully understand them, according to the new report.

One failing, says the GAO, is that plan fees are often expressed mathematically, such as “0.16% per $1,000 invested.” I guess a lot of people skipped math class the day they explained these brainteasers. But 88% understood when the cost was stated in plain English: “You are charged $1.60 for every $1,000 in your account.”

Why would plan providers use hard-to-understand language? A cynic might say it’s better for business if customers don’t know how much they pay. But Harvard Law Professor Cass Sunstein offers a more benign explanation—the “curse of knowledge.” People who write fee disclosures are experts. They know the subject like the back of their hand. They assume—wrongly—that everyday investors can navigate their oddball topic as easily as they can.

And, yes, 401(k) fees are complex. There are investment fees for money managers, and administrative fees to pay for legal, accounting, communications and other costs. Then there are service charges, like $125 to originate a loan. They add up like those mystery items on your Verizon bill.

All of this suggests you review your plan’s fees. No, it won’t be as entertaining as Netflix or Reddit. But remember, you’re paying for this party, so you might want to know how much you’re getting charged.

Browse Articles

Subscribe
Notify of
11 Comments
Inline Feedbacks
View all comments
Roboticus Aquarius
Roboticus Aquarius
1 year ago
  • My Megacorp 401K has plan fees of 3 basis points. This is separate from any fund fees I pay, of course. Fund fees range from 3 to 75 bpts. but if one has a basic portfolio they are going to be under 10 bpts.
  • My wife’s first post-Megacorp 401K was 1% plan fee 401k… but also the funds all had 3% loads, even for the money market fund. We invested only enough to get the matching, the rest went into her IRAs. She left after a few years, and we rolled her 401K into a Fidelity IRA.
  • Her second post-Megacorp 401K had plan fees of 50 basis points, but also 12b-1 fees of 1%, and average fund fees of 0.43% – not atypical for a small company 401K of that time, but that’s almost 2% still. Again, we just matched + IRA. After challenging the plan, the company changed providers. The fees are now 8 basis point for the plan, no 12b-1 fees, and the average fund is somewhere around 10 basis points.

The moral is to challenge a bad plan if you feel secure in your job or secure you can always find work. In my wife’s case, they really had no idea how much better the competing options could be until it was brought to their attention.

Last edited 1 year ago by Roboticus Aquarius
Greg Spears
Greg Spears
1 year ago

I was lucky at work because my 401(k) plan fees were always reasonable. Your wife’s story is inspiring. She fought the system and won!

Langston Holland
Langston Holland
1 year ago

Two things, in order of likelihood:

  1. You have a Unicorn tethered in your backyard.
  2. Government will burden the taxpayer with the “curse of knowledge” concerning taxation. Instead it will silently subtract money from every worker’s paycheck instead of presenting the bill at the end of the tax year. Then it will shout from the rooftops the glories of tax refunds at zero interest.

If government played by the rules they hold others to, the beginning of the end of America’s descent into socialism would commence 15 April 2022.

Last edited 1 year ago by Langston Holland
Ginger Williams
Ginger Williams
1 year ago

At 25, I signed up for a variable annuity funded through payroll deduction. Two years later, after looking at the fees on my annual statements, I spent time studying the fees of every option offered by my employer, directed my payroll deduction to the lowest fee option, and wrote the date I could move my funds out of that variable annuity without paying surrender fees on my calendar. I don’t regret the variable annuity, because it did establish the habit of investing, but it also taught me to read my statements, where the negative dollar amounts for fees are clearly stated.

Carl Book
Carl Book
1 year ago

Education is valuable, but it is awful that they are treating teachers so poorly.

Newsboy
Newsboy
1 year ago

Can we lump 403(b) plans for educators and other non-profit employers into this topic as well?

Typically these types of plans use variable annuities (with an associated mortality expense cost) that then will invest contributions into mutual fund-like sub-accounts. The end result is 2 layers of fees that typically require a Little Orphan Annie secret decoder ring in order to discern a participant’s true annual expenses. School districts in our area a decade or so back largely established a “pay to play” approach for investment companies who desired to be included in their 403(b) plans, with lower cost insitutional vendors (i.e. Vanguard, Fidelity) basically refusing to be extorted for the opportunity to offer their products to plan participants. The end-game is now higher costs and fewer choices offered inside the teachers lounge for both new signups and long-term participants.

And a final indignation on the way to retirement…another added cost: The “advisor” who setup the 403(b) plan also has practically exclusive access to impending plan retirees, which commonly results in an IRA rollover at their retirement date into…wait for it…another Variable Annuity (generating a large front-end commission) typically with an annual advisor “wrap fee” of between 1-2% taken off the top of their IRA returns!

Carl Book
Carl Book
1 year ago
Reply to  Newsboy

That would be my definition of stealing.

R Quinn
R Quinn
1 year ago

All true and interesting info people should know. But in the end there is not much a worker can do about it. The basic problem especially among smaller employers is the plan sponsor does not seek the lowest possible fee structures for their plan.

Carl Book
Carl Book
1 year ago
Reply to  R Quinn

At some point, it may be better to not participate. Years ago, my wife was in a plan that offered only mutual funds with front end loads. The employer matching contribution was a couple percent. She paid a 5 percent commission on every dollar she contributed. It still burns me when I think about it.

R Quinn
R Quinn
1 year ago
Reply to  Carl Book

That’s outrageous to the point the plan sponsor was not exercising its fiduciary responsibility.

Carl Book
Carl Book
1 year ago
Reply to  R Quinn

There is more. I got a call from the plan administrator after a few years. My wife was seriously ill so I spoke with the “salesman.” He expressed concern about her fund choice and wanted her to switch to a less risky fund. This would have entailed another front end load. When I explained that we did not want to incur another commission to switch, he became agitated and ridiculed me about my investment knowledge.

Free Newsletter

SHARE