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The Markets October 19, 2007
Study Says 401(k) Fees Can Take Huge Bite Out of Plan Balance
Hefty 401(k) plan fees can take a big bite out of a participant’s balance – a 26% chunk, according to a new study by the Congressional Research Service (CRS).
Reported by Fred Schneyer
The CRS report, “Retirement Savings Accounts: Fees, Expenses, and Account Balances,’ found that the difference in ending balances between scenarios where fees were 2% of plan assets and where they were 0.4% of assets was $92,771 – $356,434 with lower fees and $263,663 with heftier charges.
CRS researcher Patrick Purcell, Specialist in Income Security in the CRS Domestic Social Policy Division, explained in the report the scenarios studied involve a median-earning married couple saving 6% of family earnings yearly for 30 years with two-thirds of the account invested in equities and the rest in fixed income.
Purcell cited Investment Company Institute (ICI) data showing the average asset-weighted 401(k) stock fund expense ratio was 0.76% in 2006.
The calculations also used the distribution of rates of return in U.S. stock and bond markets over the 80-year period from 1926 through 2005, the researcher explained.
Meanwhile, according to the CRS, a median-earning single person who contributes 6% of earnings each year for 30 years to a retirement account that is invested two-thirds in stocks and one-third in bonds could expect to accumulate $187,738 in constant 2004 dollars if investment rates of return are at the historical median over the investment period and annual expenses are equal to 0.4% of plan assets.
Purcell said that same person in a plan where annual expenses were 2% of plan assets, could expect to accumulate $138,344, or 26.3% less than under the low-cost program.
For this report, CRS estimated the effect of expenses ranging from 0.4% to 2% of assets on the amounts accumulated in retirement accounts over a thirty-year period by married couples and single persons with high, median, and low earnings who contribute 6%, 8%, or 10% of earnings each year to a retirement account invested in a mix of stocks and bonds.
The study compared annual expenses of 0.8%, 1.2%, 1.6%, and 2% of plan assets to a low-cost “base case” in which annual expenses were equal to 0.4% of assets in the account.