Why Your 401(k) Fees Aren’t Lower

Why Your 401(k) Fees Aren’t Lower

So although the Vanguard literature may estimate 0.25% for the adviser’s fee, nothing prevents an adviser from collecting more—0.50% or even 1%—to advise a plan. How big a difference is there, one might ask, between annual fees of 0.25% and 0.50%? If a fund investor were to make annual contributions of $5,000 for 40 years and earned a compounded annualized return of 6%, he or she would end up with $773,000 if the fee charged was 0.25%. By contrast, he or she would end up with $727,000 if the fee was 0.50%. That’s a difference of $46,000. If the hypothetical adviser were to charge a fee of 0.75%, meanwhile, the investor would end up with only $683,000. That’s a whopping $90,000 reduction in final savings attributable to a half-point difference in fees.
Most workers should still stuff their 401(k)s with money because of the tax benefits the plans provide, and the matching contributions from employers, when available. But Americans who work for private businesses could use a retirement-savings plan that rivals that of U.S. government employees. The all-in annual cost of the government’s Thrift Savings Plan is 0.029% or $2.90 for every $10,000 invested. That makes it easy for investors seeking to keep things simple and cheap.

John Coumarianos

Wall Street Journal

November 6, 2016

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By |2018-01-01T00:00:00-08:00January 1st, 2018|Efficiency/Growth, Financial Regulation, Inequality, Reference|