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The True Cost of Your 401(k)

Nicole Seghetti
November 16, 2012

We all know the importance of saving for retirement. But while we mean to give our 401(k)s a good, hard look, oftentimes noble intentions -- like opening that quarterly statement that's been sitting on your kitchen counter since April -- don't always translate into action. Yet making one quick and minor adjustment to your 401(k) can mean major improvements to retiring on your terms.

The high cost of ignoring fees
Surprisingly, minor improvements in 401(k) fees can pay off substantially. A Government Accountability Office study compared the difference between paying 1.5% annually in fees versus 0.5%. It started with an individual's 401(k) balance of $20,000 and assumed it grew by 7% each year. Paying 0.5% in fees would leave the person with $70,500 in 20 years. But instead shelling out 1.5% in fees slashed the balance to $58,400 during the same period. That's a 17% haircut to your retirement nest egg. 

But, sadly, it seems we aren't giving attention to the fees we pay. A recent LIMRA study shows that 90% of 401(k) participants either didn't think they paid any fees or didn't know the fees they paid for their plans. Everyone pays a fee to have a 401(k), and workers -- not employers -- pay for most plan fees. The average plan "all-in" fee is about 0.78% per year, meaning you fork over $780 annually for every $100,000 you have in your 401(k).

Why all this talk of fees now?
Under new Department of Labor regulations enacted earlier this year, employers have to provide fee information to their 401(k) plan participants. The fee disclosures show what a worker pays on various investment options in their plans. Best of all, the fees must be spelled out in plain English and presented in hard dollars and cents.

If you own a 401(k), you received these disclosures within the past several months. But a recently conducted Plan Sponsor Council of America survey showed nearly 96% of plan sponsors reported no change in participant behavior as a result of the fee disclosure information. Worse yet, only little more than 1% of participants asked questions regarding the fee disclosure information.

Even though we employees seemingly aren't paying attention, our employers -- likely due to the increased transparency -- are advocating for lower-cost options. According to the same PSCA survey, more than 15% of plan sponsors sent out a request for proposal as a result of the fee disclosure regulations, signaling some due diligence on their part.

Doing the limbo for your dollars
One low-cost option for 401(k) plan adoption is the world of exchange-traded funds. The wildly popular ETF market has soared to over $1 trillion in assets. Basically, ETFs are mutual funds that trade intraday, like stocks. Meanwhile, traditional mutual funds are priced once a day, after the exchanges close. Due to the way ETFs trade, companies with brokerage arms are in the best position to consider them as 401(k) options. The reason? They don't have to pay a third-party broker to make the trades. That keeps expenses way down.

Consequently, brokerage Charles Schwab (NYSE: SCHW  ) already offers some ETFs in 401(k)s. Schwab plans to launch an all-ETF 401(k), but it's pushed the rollout back until 2014.  Both BlackRock (