Does Your 401(k) Cost Too Much?
Fees can take as much as 3% of an account each year. Watch out for conflicts of interest
You can bargain-hunt for virtually any item on your personal balance sheet, from mortgages and car loans to mutual funds and brokerage accounts. But when it comes to what is probably your largest asset aside from your house -- your 401(k) retirement plan -- you're stuck. Stuck, that is, with the investments your company selects, no matter how expensive they may be. Since many 401(k) plans consist of relatively high-cost mutual funds and insurance products, that's generally bad news. Indeed, the average 401(k) participant in a big plan forks over 1.07% of the account balance each year, while small plan participants pay 1.4%, on average.
With the most expensive plans running as high as 3%, "people are hollering about abuse," says Ted Benna, a benefits consultant who created the 401(k) in 1980 and is now president of the 401(k) Assn., a consulting firm in Jersey Shore, Pa. It's easy to see why. A worker who puts the $13,000 maximum you can currently invest tax- free into a 401(k) each year will have $1.166 million after 30 years, provided the portfolio returns 8% and costs 1.38% a year.
But the investor will have 14% more if costs fall to 0.70% and 25% more if they're just 0.25%, according to Vanguard Group, which is known for managing mutual funds but also administers 401(k)s.
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