Washington D.C. — The corrosive effects of high 401(k) fees are costing millions of Americans tens of thousands of dollars, forcing them to work years longer before retirement, according to a new report released today by the Center for American Progress. The report’s authors, CAP economic experts Jennifer Erickson and David Madland, propose a common-sense solution that won’t cost the government a dime but will protect consumers by improving retirement fee disclosure.
“Every day, Americans are investing hard-earned dollars in retirement accounts that aren’t working for them. Confusing and hidden fees are eating away at their savings, forcing them to work longer and save more,” said Jennifer Erickson. “It’s time to step up our nation’s consumer protections around retirement savings and ensure that workers and employers are armed with the information they need to make better choices about their investment options.”
“Better labeling of retirement fees is a no-brainer,” said David Madland. “At no cost to taxpayers, we can save workers a lot of money and make it much more likely that they can retire.”
While private-sector workers are increasingly reliant on 401(k)s and Individual Retirement Accounts, or IRAs, for their retirement, most do not know what these plans are costing them. In fact, one seemingly small decision—such as choosing a retirement fund with high or low fees—could have a huge impact on a worker’s ability to retire.
To understand how fees affect an individual, the report’s authors detail the following examples:
If a median-income worker saving 5 percent of her salary with a match from her employer selects a fund with fees of 1 percent versus a low-fee fund with a 0.25 percent fee, she will stand to lose approximately $100,000 over her lifetime. To make up the difference in her account by retirement, she would have to work more than three additional years.
If a two-person, median-income household invested in a slightly higher-than-average fund with 1.3 percent fees, these high fees will strip away one-quarter of a million dollars from its retirement savings.
Over the course of her lifetime, a worker in a similar situation earning $75,000 at age 25 would pay more than $300,000 more in fees if she were invested in the fund with 1.3 percent fees, compared to if she were invested in the fund with 0.25 percent fees. In fact, to make up the shortfall in her account by the time she retires, her total contribution—including both employer and employee contributions—would have to increase by 25 percent. Even worse, since employer contributions generally top out at or below 5 percent, she would likely have to increase her individual contribution to her retirement from 5 percent of her salary to 7.5 percent—a jump of 50 percent in her personal retirement savings each year for her entire working life.
Many Americans are not aware of the fact that high fees are eating away at their retirement savings. But even if they were, tracking down the information to understand the fees on any given retirement account can be an unnecessarily complicated task to navigate. To help consumers make more-informed choices, Erickson and Madland call for all retirement funds to have a clear, understandable label that provides consumers with relevant, concise, and accessible information about fees. Improved fee disclosure could help individuals make better financial decisions—especially since data show that higher-cost funds do not necessarily perform better—and could also force a national conversation about how best to improve our retirement system.
Picking up on the best parts of other public disclosures—such as nutrition labels, cigarette warnings, and Energy Star labels—a “Retirement Fund label” would be a visible box on all literature, either printed or web based, that offers a simple disclosure to both inform consumers about the risk of high fees and offer them a clear and comparable way to think about their fund options.