High fees and lack of financial education erode retirement savings and confidence

By Chris Horymski

Over the last 30 years, the 401(k) plan has replaced the company pension as the primary method of financing a retirement in the U.S. In theory, 401(k) plans should have been a sufficient replacement for traditional, defined benefit pensions. In practice—and this has been especially apparent over the last decade—most retirement plans based on 401(k)s aren’t up to the task. [EXPAND Read more]

The Retirement Gamble,” the latest news documentary from the PBS public affairs program “Frontline,” focuses on the many inadequacies of our current retirement system, and the 401(k) savings plan is Exhibit A. The documentary is scheduled to appear on public television stations this week.

With the first generation of employees approaching a retirement financed exclusively with a 401(k) or other similar defined contribution plan, the 401(k)’s deficiencies have been exposed. In “The Retirement Gamble,” we meet millennials with less than $10,000 in retirement savings, and baby boomers with less than $100,000, sums not nearly enough to support 30 years of retirement living. Even a retiree with $500,000 in assets appears less than comfortable with that balance.

The primary culprits are fees and lack of financial education. Depending on the size of your employer (generally, but not always, larger firms will have lower fees), the fees for a mutual fund manager of the funds within your 401(k) plus the opaque fees a plan provider charges to manage the 401(k) plan can often exceed 2 percent annually. Over a 30 year career, fees that high can compound to tens of thousands of dollars.

There have been some advances in response to this drag on savings for retirement. Since 2007, 401(k) plans have been required to offer a Qualified Default Investment Alternative, or QDIA, which often takes the form of atarget date fund. These can take much of the guesswork out of asset allocation, but target date funds can still have expense ratios approaching those of expensive actively managed funds. And since last year, employers have been required to itemize for employees the costs of their 401(k) plans and certain administrative costs. [/EXPAND]