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We all know how important is it to save for retirement. But while you already sock away a good chunk of money in your 401(k), you may not realize what you pay for your retirement account. Ignoring the fees can cost you big-time. Just how much coin is it costing you, and, more important, what action can you take to reduce that amount?
The amazingly high cost of ignoring fees
You'll want to sit down for this. A recent Demos study (link opens PDF file) shows that a dual-income household -- where each partner earns the median income for their gender each year -- will pay an average of nearly $155,000 in 401(k) fees and lost returns over the course of their working lives. That represents more than 30% of the same household's projected "no fee" retirement balance of $510,000!
Unfortunately, we aren't paying attention to our retirement account fees. A separate study shows that 9 out of 10 workers either didn't think they paid fees or didn't know the fees they paid for their 401(k) plans. But everyone pays to have a retirement account. And workers -- not employers -- bear the brunt of 401(k) plan fees. In fact, employees now pay 91% of all fees, up from the 78% paid two years earlier.
Department of Labor regulations, which went into effect earlier this year, now mandate employers to provide fee disclosures to their 401(k) plan participants. Employers must show -- in plain English and dollars and cents -- what plan participants pay for every investment option in their plan.
A new frontier
We employees might be ignoring plan fees, but our employers aren't. And, as a result of the newly enacted fee disclosure regulations, they're advocating for lower-cost 401(k) plan options. Likely due to the increased transparency, more than 15% of employers recently shopped for a different plan. Regardless of their motivations, employers' actions will likely drive plan fees even lower for employees.
Low-cost options are already prevalent in most 401(k) plans, including target-date funds and index funds. Vanguard and Fidelity -- the big-dog 401(k) plan administrators -- already offer target-date funds and broad stock market index funds, some with annual expense ratios well below their respective Morningstar category averages.
But exchange-traded funds, or ETFs, are catching on as low-cost 401(k) investment options. The ever-growing and wildly popular ETF market has skyrocketed to over $1 trillion in assets. And, as the ETF market has swelled, fees have dropped considerably, mostly due to cutthroat competition in this market. Three companies -- BlackRock's (NYSE: BLK ) iShares, State Street (NYSE: STT ) , and Vanguard -- dominate the market, with nearly 70% of global market share among them.
While the big plan administrators haven't embraced ETFs, many brokerage companies are aiming to offer them in 401(k) plans. ING Direct ShareBuilder, part of Capital One Financial (NYSE: COF ) , provides an ETF-only 401(k) plan. The annual expense ratios for its model portfolios are very inexpensive and give target-date and index funds a serious run for their money. TD AMERITRADE (NYSE: AMTD ) and BlackRock also offer ETFs in their respective 401(k) platforms.
Not to be left out, Charles Schwab (NYSE: SCHW ) has been promising an all-ETF 401(k) plan for some time, but its unveiling has been pushed out a couple of times. It's scheduled to roll out in 2014. In the meantime, Schwab makes some ETF options available in its 401(k) plans.
A Foolish plea
Amazingly, small improvements in 401(k) fees can translate into huge savings. Think about how much money is staying in your account and how much is being lost to fees each time you diligently fork over part of your paycheck to your 401(k). Until more affordable alternatives -- like ETFs -- are available in your 401(k), closely review your plan's current investment options, pay particular attention your fees, and select low-cost options. They can save you big-time.
In order to retire on your terms, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.