Fees can take a bite out of your 401(k)
The other night, as my husband was channel surfing, he flipped onto PBS “Frontline” just as the opening credits were scrolling down the screen. A program called “The Retirement Gamble” was just beginning. That got our attention.
The program was about the decline of defined-benefit plans and the rise of 401(k) plans, but perhaps the greatest takeaway was about how important it is to be mindful of fees that you are charged on your retirement plan and to have a plan for retirement.
We have a retirement crisis in this country, and there’s a lot of reasons for that. One is that retirement saving has changed dramatically in the past few decades — not because of the stock market highs and lows, but because of the nature of retirement plans.
In 1970, the proportion of workers covered by a defined-benefit plan in the private sector was 40 percent. By 2011, that figure had fallen to just 3 percent. At the same time the number of people with a defined-contribution plan, a 401(k) plan, has risen from 7 percent to 31 percent.
What does that mean? It means that fewer workers will have in the future two guaranteed sources of income — the employer-sponsored pension and Social Security.
But that’s not all. Another reason for this crisis is reflected in statistics from the Labor Department that show that only half of all Americans have an employer-sponsored retirement plan at all.
In other words, a lot of Americans do not have a way to save for retirement at work. They must save voluntarily on their own, and while there are ways to do that, the truth is that most people don’t save outside of work.
One statistic from the “Frontline” program: One-third of all Americans have no retirement savings at all.
Another reason is that those who do save at work are, on average, paying high fees to do so. In some cases, when you take into account administrative fees, expense ratios (that’s investment-speak for mutual-fund fees) and other management fees, the figure can be 1 percent, 2 percent or more of your retirement savings.
Jack Bogle, the man behind the Vanguard Funds and a strong proponent of index funds versus actively managed funds (those are funds that essentially mimic an index like the Standard and Poor’s 500 rather than having a manager who makes investment decisions according to defined criteria) offered an interesting point on why fees matter.
If you take a retirement account and assume a 7 percent annualized rate of return and you subtract 2 percent in fees, you are left with a return of 5 percent. Over the course of 50 years (meaning you are saving for retirement from your early 20s to your retirement years), you will have given up 63 percent to fees versus what you would have kept for your retirement.
Bogle called it the “tyranny of compounding costs.” While none of the people “Frontline” interviewed from the brokerage industry could offer a response to his figures, clearly they were uncomfortable with the assertion.
Most Americans must take control of their own retirement destiny. You need to be paying attention and saving.
When I was 20, the last thing on my mind was saving for retirement. When I was 25, I got a job at a business that had a retirement plan. Looking back, I realize now that was truly a gift because it got me on the right road to saving.
I don’t have room here to fully explain all I’d like, but I would encourage you to watch www.pbs.org/wgbh/pages/frontline/retirement-gamble/.
It’s an hour of your time and an investment in your future.