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401(k)s strangled by fees, study shows

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By The Associated Press
Saturday, April 12, 2014, 12:01 a.m.
 

WASHINGTON — It's the silent enemy in our retirement accounts: High fees.

And now a new study finds that the typical 401(k) fees — adding up to a modest-sounding 1 percent a year — would erase $70,000 from an average worker's account over a four-decade career compared with lower-cost options. To compensate for the higher fees, someone would have to work an extra three years before retiring.

The study by the liberal think tank Center for American Progress, backed by industry and government data, suggests that workers who are struggling to save enough for retirement are being further held back by fund costs.

“The corrosive effect of high fees in many of these retirement accounts forces many Americans to work years longer than necessary or than planned,” concludes the report, released Friday.

Most savers have only a vague idea how much they're paying in 401(k) fees or what alternatives exist, though the information is provided in often dense and complex fund statements. High fees seldom lead to high returns. And critics say they hurt ordinary investors — much more so than, say, Wall Street's high-speed trading systems, which benefit pros and have increasingly drawn the eye of regulators.

Consider what would happen to a 25-year-old worker, earning the median income of $30,500, who puts 5 percent of his or her pay in a 401(k) account and whose employer chips in 5 percent:

• If the plan charged 0.25 percent in annual fees, a widely available low-cost option, and the investment return averaged 6.8 percent a year, the account would equal $476,745 when the worker turned 67 (the age he or she could retire with full Social Security benefits).

• If the plan charged the typical 1 percent, the account would reach only $405,454 — a $71,000 shortfall.

• If the plan charged 1.3 percent — common for 401(k) plans at small companies — the account would reach $380,649, a $96,000 shortfall. The worker would have to work four more years to make up the gap. (The analysis assumes the worker's pay rises 3.6 percent a year.)

The higher fees often accompany funds that try to beat market indexes by actively buying and selling securities. Index funds, which track benchmarks such as the Standard & Poor's 500, don't require active management and typically charge lower fees.

With stocks having hit record highs before being clobbered in recent days, many investors have been on edge over the market's ups and downs. But many experts say timing the market is nearly impossible. By contrast, investors can increase their returns by limiting their funds' fees.

Most stock funds will match the performance of the entire market over time, so those with the lowest management costs will generate better returns, said Russel Kinnel, director of research for Morningstar.

“Fees are a crucial determinant of how well you do,” Kinnel said.

 

 
 


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