An excess 401(k) charge of 1% over 20-25 years could diminish returns by as much as 20%! If you think that's bad, consider that 90% of plans are paying 3-3.5%, and some as high as 5%.
In an interview on February 1, 2008, between Matthew Hutcheson, an expert in 401(k)s from Portland, Oregon, and Tess Vigeland on Marketplace, Hutcheson says that 90% or more of 401(k) plans in the United States are paying approximately 3-3.5% in fees; some are paying upwards of 5%.
Expenses drag down any upward performance of 401(k) investments, so the participant receives fewer dollars in return at retirement. An excess charge of just 1% over 20-25 years will diminish the final dollar retiree return by an astonishing 20%. Think of how 2-3% in unneeded expenses would further reduce it!
Now, the government is getting into the act. It is no longer going to remain passive on this important issue, because tens of millions of workers have fewer retirement savings than they planned on, not only due to recent investment debacles, but also because fees are generally so high.
The engine of our economy
Vice President Biden heads a middle class task force started 12 months ago. The idea is to advance living conditions of those sandwiched between the working and upper class. This usually includes professionals as well as skilled laborers and middle plus lower management. Biden refers to this segment as, “the economic engine of our economy.”
In the proposal, financial advisors who now get a high fee for steering workers toward 401K(k) investment options with big commissions (at the expense of the employee), would no longer be able to do this. The White House said: "Some kinds of investments are more profitable for financial institutions than others, but those investments may not be the best ones for workers.”
The proposal would place greater emphasis on low fees than performance data for making choices. This approach favors index funds, which have been shown to achieve better returns than managed funds over time.
The proposal is available for comments until May 5, 2010 and then the committee will make a final judgment. Some argue that government shouldn’t get involved in regulating the financial industry. This may be so, but if consumers won’t protect themselves, and there is no evidence, that they do, perhaps big brother is the next best option.
For the average American, fewer fees associated with 401(k)s can only put more money in his pocket rather than the financial advisor the company he represents.
This information and content is offered for informative and educational purposes only. MyMoneyMD, LLC is not acting as a Registered Investment Advisor, Investment Counsel, Tax Advisor, or Legal Advisor.