NCPA - National Center for Policy Analysis

Management Fees Can Substantially Reduce Retirement Savings

December 3, 2001

High-expense 401(k) and 403(b) plans are costing plan participants, warns financial writer Scott Burns.

Management fees vary widely -- for instance, managed funds compared with "passive" index funds.

  • A worker who invests in a typical 403(b) plan pays expenses of about 2 percent a year for a variable annuity, which may cost $500,000 in retirement assets.
  • The nine most commonly used funds of Fidelity Investments, the nation's largest 401(k) plan provider, have average annual expenses of 0.77 percent.
  • Their U.S. Equity Index fund has an expense ratio of 0.18 percent.

Most managed funds can't beat the performance of an index fund and thus can't offset the costs.

How do these expenses affect retirement savings? Take a 30-year-old worker starting at $40,000, with 3 percent inflation, 4 percent annual raises, and a 401(k) plan in which the employee saves 6 percent of salary with a typical 50 percent employer match.

  • In a 100-percent equity investment program with an 11 percent annual return, our saver would put aside $309,000 and see it grow to $2.6 million by age 67.
  • In a plan with fees of 0.75 percent a year, the growth drops to $1.9 million, with about $420,000 or 22 percent lost to the fees.

For 401(k) plan participants investing with a 70/30 equity/fixed-income mix, their expected return would be 9.29 percent a year.

  • A 2 percent annual fee takes 75 percent of all growth -- and costs the employee more than $600,000.
  • But an annual fee of 0.75 percent still takes nearly 24 percent.

Management costs could be reduced. For example, using index units from Barclay's Global Investors, Exxon Mobil Corp. delivers investment options for its employees that cost as little as 0.01 percent to manage.

Source: Scott Burns, "Managers' fees can add up to big losses, Dallas Morning News, November 27, 2001.

 

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