The True Cost of Your 401(k)


We all know the importance of saving for retirement. But while we mean to give our 401(k)s a good, hard look, oftentimes noble intentions -- like opening that quarterly statement that's been sitting on your kitchen counter since April -- don't always translate into action. Yet making one quick and minor adjustment to your 401(k) can mean major improvements to retiring on your terms.

The high cost of ignoring fees
Surprisingly, minor improvements in 401(k) fees can pay off substantially. A Government Accountability Office study compared the difference between paying 1.5% annually in fees versus 0.5%. It started with an individual's 401(k) balance of $20,000 and assumed it grew by 7% each year. Paying 0.5% in fees would leave the person with $70,500 in 20 years. But instead shelling out 1.5% in fees slashed the balance to $58,400 during the same period. That's a 17% haircut to your retirement nest egg.

But, sadly, it seems we aren't giving attention to the fees we pay. A recent LIMRA study shows that 90% of 401(k) participants either didn't think they paid any fees or didn't know the fees they paid for their plans. Everyone pays a fee to have a 401(k), and workers -- not employers -- pay for most plan fees. The average plan "all-in" fee is about 0.78% per year, meaning you fork over $780 annually for every $100,000 you have in your 401(k).

Why all this talk of fees now?
Under new Department of Labor regulations enacted earlier this year, employers have to provide fee information to their 401(k) plan participants. The fee disclosures show what a worker pays on various investment options in their plans. Best of all, the fees must be spelled out in plain English and presented in hard dollars and cents.

If you own a 401(k), you received these disclosures within the past several months. But a recently conducted Plan Sponsor Council of America survey showed nearly 96% of plan sponsors reported no change in participant behavior as a result of the fee disclosure information. Worse yet, only little more than 1% of participants asked questions regarding the fee disclosure information.

Even though we employees seemingly aren't paying attention, our employers -- likely due to the increased transparency -- are advocating for lower-cost options. According to the same PSCA survey, more than 15% of plan sponsors sent out a request for proposal as a result of the fee disclosure regulations, signaling some due diligence on their part.

Doing the limbo for your dollars
One low-cost option for 401(k) plan adoption is the world of exchange-traded funds. The wildly popular ETF market has soared to over $1 trillion in assets. Basically, ETFs are mutual funds that trade intraday, like stocks. Meanwhile, traditional mutual funds are priced once a day, after the exchanges close. Due to the way ETFs trade, companies with brokerage arms are in the best position to consider them as 401(k) options. The reason? They don't have to pay a third-party broker to make the trades. That keeps expenses way down.

Consequently, brokerage Charles Schwab (NYS: SCHW) already offers some ETFs in 401(k)s. Schwab plans to launch an all-ETF 401(k), but it's pushed the rollout back until 2014. Both BlackRock (NYS: BLK) and TD Ameritrade (NYS: AMTD) also offer ETFs in their respective 401(k) platforms. And ING Direct ShareBuilder, now part of Capital One Financial (NYS: COF) , already provides an ETF-only 401(k) plan. The annual fees for its model portfolios range between 0.15% and 0.20%.

So far, the biggest players on the 401(k) field haven't changed their game plans. The largest 401(k) plan administrators -- Fidelity, Aon Hewitt (NYS: AON) , and Vanguard -- boast roughly 27%, 9%, and 8%, respectively, of U.S. market share. But since they already offer very inexpensive plan options, like broad market index funds with fees near 0.10% per year, don't look to them for substantial fee cuts. But, eventually, they may be forced to offer ETFs in order to keep pace with the competition.

Foolish bottom line
Shaving a few basis points off your fees can translate into big-time savings. As you diligently chip in a chunk of your paycheck to your 401(k), think about how much money is staying in your account and how much is lining the pockets of the investment managers. Look over your fund options, and pay close attention to the fees you pay. They can cost you not only dollars and cents, but also your targeted retirement date.

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Fool contributor Nicole Seghetti has no positions in the stocks mentioned above. The Motley Fool owns shares of Aon and Charles Schwab. Motley Fool newsletter services recommend TD AMERITRADE Holding, Aon, BlackRock, and Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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