Wed March 28, 2012
How Much Do You Pay To Maintain Your 401(K)?
JACKI LYDEN, HOST:
And now to matters of personal finance. How much do you pay to maintain your 401(k)? The question may seem trivial, but according to the AARP, the average American has no idea how much they pay in management fees for that retirement fund or that they're even paying management fees at all.
It's estimated, though, that brokers and banks make anywhere from $30 billion to $60 billion a year in 401(k) fees. That's led to an outcry by some consumer advocates who say there needs to be more disclosure about why banks charge for this service.
And here to tell us more about it is Ian Salisbury from SmartMoney magazine. He wrote about hidden 401(k) fees recently for that Dow Jones publication. Welcome to the show.
IAN SALISBURY: Thank you very much for having me.
LYDEN: So what's considered a lot of money to pay for these fees?
SALISBURY: You know, people pay anywhere up from 2 percent of their assets a year. Cheap ones, you can get it down to just two-tenths or three-tenths of a percentage point. That may not sound like a lot of money, but paying too much up front can put a huge dent in the nest egg you've accumulated when you retire.
LYDEN: Absolutely. I mean, what would you call too much money? I mean, if you're talking about $30 billion to $60 billion a year in 401(k)...
LYDEN: ...fees, just the fees, not our contribution. That's a great deal of money, obviously.
SALISBURY: That is a great deal of money. Now, some of that, you know, probably needs to be spent one way or another. You know, 401(k)s are - there's a lot of recordkeeping involved. They have to keep track of, you know, millions of accounts. You know, they give you a price you can look up every day, you know, how much your balance is. You can trade different investments. There are a lot of kind of safeguards in place and accounting rules to sort of prevent fraud.
LYDEN: So that's how the banks justify these fees?
SALISBURY: Right. Now, so the problem is, though, that it's not that the people aren't getting anything. It's that the banks - or, usually, they're mutual fund companies, actually - you know, have an incentive to sell 401(k) investors as much stuff as possible. You know, they make more money by selling more stuff, so they're always going to argue that you need as much as possible, but it's not really clear that you do.
LYDEN: If you're just joining us, this is TELL ME MORE from NPR News. We're talking about hidden fees consumers are paying to banks to manage their 401(k) retirement accounts.
Brokers make tens of billions of dollars in management fees and some consumers don't even know why they're paying them or that they are paying them. With me is Ian Salisbury from SmartMoney magazine.
Ian, 1 percent a year might seem reasonable to a lot of consumers, but you found that, over time, this really does add up and it can even interfere with a person's retirement plans.
SALISBURY: Yeah. So we saw one study that showed, you know, paying - I think they - I can't remember the exact numbers, but it was - you know, basically - you know, 1.25 percent or .25 percent. You know, it could add years, you know, even a decade, onto how long you have to work to retire.
LYDEN: How does that work?
SALISBURY: Well, it's the miracle of compound interest. If you invest a little bit now, it's worth a whole lot more later. Basically, for every percentage point you pay in fees, that's a percentage point less you have in returns.
Another way to think about, you know, 1 percent - the stock market hasn't returned much over the past decade. If you put that return in context, you know, 1 percent a year - if you only are getting a return on stocks of 1 or 3 percent a year, that's half or a third of your return right there. So it can really add up.
LYDEN: So, one of the other big issues that consumer advocates are pointing out is that, since these fees aren't acknowledged, it makes it very difficult to comparison shop - for companies to comparison shop for 401(k) plans.
SALISBURY: Right. So I think one of the big issues is that there are two components to paying for a 401(k). One, is the accounting costs and the other is the fees that you pay the investment manager.
Now, a 401(k) can be set up any way, but a lot of companies - for them, it's sort of a ticklish issue, you know, whether they're going to pay the accounting costs or they're going to ask the employees to pay the accounting costs. And they'd rather sort of not deal with it. So what the fund - the way the fund industry has evolved is they've said, look, don't worry about these accounting costs that are giving you a headache. We'll give you the plan for free. But the plan you get for free has certain investment funds on it and we're going to have some say over what those investment funds are.
So a lot of companies take that deal - probably the majority of them - and it looks to them like they're free and it looks to the employees like the plan is free. But the money is made from the investment funds and the investment funds on your plan - if that's the type of plan you have - actually collect money from you and hand it back to the company that packages the plan. So a lot of people are unhappy with that. To them, it looks like a kickback.
LYDEN: Right. And, also, unless you are self-employed, a lot of people can't really shop for their 401(k) pension plans, anyway, because they sort of come with being employed.
SALISBURY: Well, right. So the employer, you know, has an incentive to make his or her job as easy as possible. So that deal to the employer where the back office fees are covered, you know, is very appealing to them. The problem is those plans seem to be, you know, quite a bit more expensive than the ones that are priced a la carte.
So he or she is saving themselves some trouble, but their employees, you know, end up picking the tab and probably pay more than they would otherwise.
LYDEN: So getting some concerns about this, I gather, the Department of Labor said that new rules are coming down the pike. They established these just last month in February and that these rules will make banks and brokers disclose all these 401(k) fees. Do you think that will make the process more fair?
SALISBURY: Well, so the Department of Labor is hoping that if the employers get more information about the funds and these plans that are sort of presented to them as free are sort of shown to actually not be free, and then they can see that the kind of all-in cost of the so to speak free plan is higher than one that has some up front costs, then they'll be better shoppers and kind of wring costs out of the system.
That's what they hope, anyways, and it kind of remains to be seen, you know, sort of whether it will work or not.
LYDEN: So Ian Salisbury, I just have a question. All these 401(k) accounts have been around for several decades now. Right?
LYDEN: How much money are we talking about in these accounts when we talk about fees of $30 billion to $60 billion a year?
LYDEN: What about the total aggregate?
SALISBURY: Yeah. I think so. I think there are several trillion dollars and there's a lot more if you count IRAs. You know, people quit their job and then they roll the money into an IRA, and I think it's probably about double that amount, you know, closer to seven or eight trillion if you counted the amount of money in IRAs.
401(k)s now are sort of the main engine for, you know, most workers' retirements and they're only becoming more important.
LYDEN: Ian Salisbury is a writer for SmartMoney magazine and he joined us from our studios in New York City. Ian Salisbury, thanks very much for speaking with us today.
SALISBURY: Thanks for having me.
(SOUNDBITE OF MUSIC)
LYDEN: Coming up, as a young Iranian-American woman, Jasmin Darznik didn't know much about her family history, that was until she found an old photograph that hinted at her mother's secret past.
JASMIN DARZNIK: It didn't square with anything I knew about my mother. It didn't square with anything I knew even about Iran.
LYDEN: Her book, "The Good Daughter," tells a story of generations of women in her family, and it's the last chapter in our Women's History Month Biography series. That's in a few minutes on TELL ME MORE from NPR News. I'm Jacki Lyden.
(SOUNDBITE OF MUSIC)
LYDEN: The singer, Morley, has traveled the world working with children in conflict zones and performing for people like Nelson Mandela and the Dalai Lama. Her latest and most personal album is called "Undivided." We hear new music from Morley next time on TELL ME MORE.
(SOUNDBITE OF SONG, "WOMEN OF HOPE")
MORLEY: (Singing) They stood together under a tree in tall grass on TV telling the world their story. Transcript provided by NPR, Copyright National Public Radio.