Most workers don’t know that they are paying 401(k) fees. Less than a quarter of current employees (23 percent) say 401(k) fees are deducted from their account, while 71 percent report that they do not pay any fees, according to a new AARP survey of 803 401(k) participants age 25 and older conducted by Woelfel Research. Another 6 percent of the survey respondents say they don’t know whether they pay any fees.
Survey respondents were then told that financial services companies that manage 401(k) plans charge fees for administering and managing those plans, and employers or employees must pay those fees. The majority of the survey respondents (62 percent) say they are unaware of how much they are paying in fees for their plans. Among those who know how much they pay in fees, the most common free range is between 1.1 percent and 5 percent of their account balance.
401(k) fees can have a dramatic impact on the size of your nest egg after a career spent saving. An employee who contributes $5,000 annually to a 401(k) for 35 years and earns an annual return of 7 percent would have $469,000 upon retirement. However, if an annual fee of 1.5 percent of the account balance is deducted from the 401(k), the employee would accumulate only $345,000 over the 35-year period.
“Americans are trying to plan for their retirement without all the information they need about their 401(k) plans,” says Jean Setzfand, AARP’s director of financial security. “The research shows a clear lack of understanding about 401(k) fees and the impact they might have on one’s saving.”
When making investment decisions, retirement savers generally pay more attention to the reputation of the financial services company that manages their investments (92 percent), the risk of investments (92 percent), the past performance of funds (91 percent), and diversification (90 percent), than how much they are paying in fees (81 percent). Those between ages 25 and 49 pay more attention to fees (85 percent) than those age 50 and older (80 percent).
Workers typically find fee information using fund choice materials provided by their employer, mutual fund prospectuses, and a personal financial adviser. Some people also turn to the Internet or financial magazine articles, AARP found. Older workers were the most likely to seek out a financial adviser, while younger individuals were the most fond of Internet information. About a third of investors admit that they do not feel knowledgeable about the impact that fees have on their retirement savings. “Fees are often hard to read and understand even when you know you are paying them,” says Setzfand. “And even small fees can have a significant negative impact over a lifetime of saving.”
AARP recently launched a 401(k) fee calculator, powered by data from BrightScope Inc., that can estimate the fees associated with individual 401(k) plans and compare them to the average fees for a low-cost 401(k). The tool, which requires a free registration, also estimates how the fees you are charged will impact your retirement savings over your lifetime.