Like the frog sitting unwittingly in a pot of slowly boiling water, the American public has been slowly giving away their future quality of life, without much notice. Even stern warnings from the Department of Labor about excessive and hidden 401(k) fees eroding our ability to survive in future life seem to fall on deaf ears. Or maybe it’s that the warnings are drowned out by the marketing machines of Wall Street, where you’ll find the real beneficiaries of most 401(k) plans.
I can tell you that it’s not happening because people don’t care. This is not about apathy as much as it is a lack of awareness. In fact, when people look under the hoods of their plans, they are often outraged. Outraged at the broker who sold them, the provider they trusted and sometimes, themselves, for letting this happen.
Don’t throw the baby out with the bathwater.
The 401(k) is not broken. The 401(k) is a wonderful piece of tax code that allows us to create real financial freedom by taking part in a stock market that, although volatile, has always had a long term upward trajectory. But it comes with a big “but.” The 401(k) is wonderful, BUT only if you are minimizing fees and removing unnecessary layers of compensation. It’s wonderful, BUT only if you remove all of the conflicts of interest that line the pockets of middlemen. It’s wonderful if you are using low-cost index funds which have shown to almost always outperform the insanely expensive “active” fund managers who promise to beat the market with their superior knowledge and pinstriped suits. As Vanguard founder and legend Jack Bogle warns, “Not only have I never met anybody who knew how to do it (outperform the market), I have never met anybody who had met anybody that knew how to do it.”
The retirement industry is as opaque and predatory as ever. The government estimates that there is $17 billion being paid each year in “hidden fees and backdoor payments.” In 2012, the industry was finally forced to disclose fees after 30 years of keeping us in the dark. But that hasn’t seemed to help, because the disclosures can be 20 to 35 pages long and require a PhD to decipher. As most Americans work their tails off to provide for their families, a proverbial hole in their boats is draining their retirement savings. And nearly 60 percent of Americans believe they pay no 401(k) fees whatsoever–that’s like thinking Las Vegas is a charitable endeavor. Nothing could be further from the truth. According to public policy think tank Demos, the average worker will lose $154,794 to 401(k) fees over his or her lifetime. A higher-income worker will lose upward of $277,000.
So how much is too much? When we hear “one, two or three percent in annual fees,” we have no context for what that really means. Imagine three childhood friends, David, Tyler, and Joe, all age 35, and all have $100,000 to invest. Each selects a different mutual fund, and all of which perform equally in the market at eight percent annually. At age 65, they get together to compare account balances. Upon deeper inspection, they realize that the fees they have been paying are drastically different from one another. They are paying annual fees of one percent, two percent, and three percent, respectively.
After 30 years Joe’s balance grows to $432,000, Tyler’s is $574, 000 while David has accumulated $761,000. Same investments, the same returns and yet David has nearly twice as much money for retirement as Joe. Joe, with the highest fees, runs out of money well before age 75 while David’s will last until age 95. Said another way, shaving off one percent in fees means that an individual’s money will last 10 ADDITIONAL years in retirement!
Now for the good news. The game has changed, and you have power to influence. In fact, your employer has a legal “fiduciary” obligation to make sure your plan is set up to serve your best interests (says the Department of Labor). And employers are being sued left and right by their employees, so they should be all ears to your concerns: see the article at www.forbes.com.
What Can You Do?
Step one is to ask your company for a copy of your fee disclosure form. It is required to be provided to all plan participants.
Step two: ask if your employer has “benchmarked” the plan recently. Your employer is obligated to benchmark the plan on a regular basis against potentially superior lower cost alternatives. And if the overall result shows it’s better for the employees to switch, they must.
Step three: you can see how your plan stacks up to similar size plans at http://americasbest401k.com/medmark/ and even forward the results to your employer.
You can’t know where you are going if you don’t know where you are. And don’t buy the myth that you have no control of your company’s 401(k). It’s your money, your future, and you do have a say in the matter.