One of the biggest downsides of the 401k is that there are so many people who need to get paid in order for the whole process to work. So with the administrators, fund managers, brokers, etc all needing to charge fees for their work, it can really cut into the investors’ earnings.
To add to it, the fees you pay on your 401k kind of work in an “out of sight, out of mind” type of way. You don’t get billed for your fees, rather they are conveniently taken out without you really even knowing about it. Sure, if you do some digging you can find out a bit about what you are paying, but it is all pretty ambiguous to the average 401k account holder.
And to take it even further, most people don’t realize the impact that a 1% fee has on their investments over the course of 30 years. If many people saw it in dollar figures, rather than percentages, they would be a bit more interested.
BrightScope’s 401k fees analysis
So, this leads us to an interesting website I just found called BrightScope – which allows users to type in any company name and see how their 401k fees compare with others.
Just by typing in the company name you can get information (for most larger companies) about how they compare to the rest of companies in the industry…
But if you sign up for a free account (which takes about 30 seconds) you can do a detailed analysis of your plan and investments. The analysis includes details on how much you are currently paying in 401k fees and what it will cost you (in dollars) over the life of your investments. My hunch is that this will be a pretty eye-opening exercise for many…
It seems like they are trying to steer investors to rollover their 401k to an IRA, which could confuse some because you can’t rollover an IRA while you are still working at the company. It would be nice if they clarified this a bit, but it still provides some insightful data nonetheless.
{ 4 comments… read them below or add one }
Thanks for the reminder about BrightScope! I had checked it a while ago but I couldn’t find any information about my husbands 401K. I was pleasantly surprised to see it there now and it was rated an 82! I knew the fees were low but wasn’t sure how the investments were. I am glad to see its one of the best! Makes me want to up my % to max it out – I have been holding back not knowing if the plan was that good or not.
Thanks for your suggestion to watch fees. However, that is not so easy to do. Your “out of sight out of mind type” is the way “no load funds and insurance products for the most part are reported. Also, the fees can be different for different services as well as different products. Often, each company tries to create a slightly different service, product, or guarantee, if available, to provide something unique to market. And certainly many different products within their own line. Thus, it might be reasonable to think that such a broad analysis of fees may not be as clear cut as stated.
I appreciate you bringing this up, however, because that is why many people trust advisors to note these matters to help them choose what fits them. Customizing what they require and desire makes those fees worthwhile.
I like the idea of BrightScope, but the ratings consider things like employee participation rate. Not that there’s anything wrong with that, but I don’t consider that a metric of a good plan… many of the people I’ve worked with during my career just aren’t that savvy, or quite frankly, that interested in investing for retirement. Too many of them simply see it as another chunk of money taken out of their check before they get to spend it.
Still, they do have some useful and interesting information on their site.
That is a great article and Brightscope is doing good work.
In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your 401k plan may substantially reduce the growth in your account. The following example demonstrates how fees and expenses can impact your account.
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.