401(k) Fees Are Robbing You Blind

401k Office desk problem
Everybody knows you should be investing in your company's 401(k) plan, but here's something that almost nobody knows: Investing in a 401(k) could cost your three years' salary.

That's the surprising upshot of a new study by the financial folks at NerdWallet, whose InvestingNerd division just ran a study concluding that "9 out of 10 Americans (92.6%) dramatically underestimated the total 401(k) fees the average household will pay over the course of a lifetime."

According to NerdWallet, when posed the question "How much will the average American household with 2 working adults pay in 401(k) fees over the course of their lifetime?"
  • 38.1 percent of respondents thought a 401(k) might cost them less than $10,000.
  • 32.8 percent guessed somewhere between $10,000 and $50,000.
  • 13.8 percent thought $50,000 to $100,000.
  • 7.9 percent said $100,000 to $150,000.
  • And 4.1 percent tried "The Price Is Right" gambit, shooting the moon and guessing in excess of $200,000.
The correct answer is $150,000 to $200,000 -- but only 3.3 percent of respondents got it right.

The High Price of a Lifetime of Saving

NerdWallet underlies its findings with a report by public policy organization Demos from last summer, which added the further frightening fact that among folks investing in 401(k) plans, a full two-thirds had no idea they were paying anything at all for their 401(k) (which actually makes all of the folks who guessed wrong in NerdWallet's poll look pretty smart by comparison).

U.S. Census Bureau figures put the average household income in America today at just a hair over $50,000. Demos' report, however, shows that over the course of an investing lifetime, an average two-income family in the U.S. could spend as much as $155,000 paying the fees that managers charge for running the funds that make up your 401(k).

How does this happen? It's quite simple, really. When you invest in your company's 401(k), unless you keep the money in cash (and with cash yielding less than 1 percent today, good luck with that), what you're usually doing is buying various mutual funds that are held within your 401(k) account.

The 401(k) industry says expense ratios across all funds averaged about 0.78 percent in 2011. And according to Demos' calculations, deducting these fees year after year, every year, over the course of an investing lifetime, drags down the returns from investing in 401(k)s by the aforementioned $155,000.

That's a bit more than three years' salary for most Americans.

What It Means for You

This hardly seems fair. For years we've heard about the imminent demise of Social Security, with workers today paying money into the system -- and that money being immediately doled out to retirees today, rather than tucked away to pay back today's payers.

We all know that corporate pension plans are a thing of the past, as companies all across the country try by hook and by crook to do away with them. Witness Boeing's (BA) contentious negotiations with its labor unions last year. (By the way, Boeing won, and its workers are slowly shifting to 401(k)s.)

Yet now we learn from Demos and NerdWallet that doing what you're supposed to be doing -- investing steadily in your future by making regular deposits in your 401(k) -- could cost you three years' salary. Unfair!

So how do you cut this cost, and keep more of your money for yourself? Actually, that's not too hard.

Most funds are "actively managed" by managers who pick and choose stocks for their funds, and the fees for these services add up to about 0.93 percent on average -- again, year after year, every year. Putting your 401(k) money in passive "index" funds, which simply and automatically track the returns of major stock market indexes, can cost as little as 0.14 percent per fund -- less than one-fifth the average cost.

Sound like a better deal to you? In many cases, it can be. Click here to find out more.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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LOL, I am a retired stock broker. The thing to focus on is the net after fees return. What they are saying is you should pay more attention to what you are charged than what you make. If you are not making money that matters.

April 26 2013 at 10:25 AM Report abuse rate up rate down Reply

I see they failed to mention how many union pension funds are bankrupt because corrupt union executives stuck their greedy hands into those funds and decimated them. That's why they need to keep looking for new blood and need to keep trying to wrestle away retirement accounts from corporations. They need to rob Peter to pay Paul.

April 25 2013 at 11:50 PM Report abuse -2 rate up rate down Reply
1 reply to d1anaw's comment

Actually is is Union representation that is and has been looking out for the best interest of their members. And rightfully so. It is the fat cat CEO"s and their goldren parachutes and bloated salarys robbing the pention funds. They could care less about their hard working employees they will just jump to another company. All companys should be made by the federal govornment to fully fund their pentions proior to any management increase in pay. That is the answer to the problem.

April 26 2013 at 6:00 AM Report abuse +2 rate up rate down Reply
Don Schnickelfelter

I can't believe that Motley Fool would be involved with this kind of disinformation. The article says that anyone with a 401K will lose $155,000 to fees over a lifetime of work and investing in a 401K. That is just not true. That would mean that "everyone" is making the same income and the same contribution to their 401K and that every employer is making/or not the same matching contribution. Impossible. Motley Fool ought to be ashamed of trying to "fool" their readers with this kind of nonsense.

Also they offer their "advice" to use index mutual funds. That may be dangerous to your financial health. Index funds provide the "average" return for everyone, minus a small fee (can't escape the fee), and are designed primarily for sheeple. If you are happy with average you will be just fine. However, some other funds can and do beat the average on a regular basis, and sometimes quite handily. Some of you hard working investors might to put some of your money in some funds with a better record and with a slightly larger fee. Over a lifetime of work it can make a very substantial difference in where you end up.

Motley Fool is a find website but sometime they just wander into the woods and get lost.

April 25 2013 at 10:21 PM Report abuse rate up rate down Reply

Very interesting and maybe answers a question for me. I had been offered the opportunity to invest at two different companies. I just couldn't figure out why I was being hard sold the package by the company managers. Actually ridiculing me for not signing on. Although I knew it was a good thing for me, I didn't see what they had to gain and it raised my suspicions enough that I didn't participate at the time. I still don't know for sure, but I suspect there was some cheese involved for the uppety ups.

April 25 2013 at 9:22 PM Report abuse rate up rate down Reply

Back in 1969, I started funding my retirement with the 3 things everyone then said was crazy. Gold, silver and dividend paying whole life insurance. I was 18 and crazy===Like a fox! I knew then SS was a ponsi scheme and there were no 401ks.

April 25 2013 at 7:01 PM Report abuse -1 rate up rate down Reply

PBS has been showing a special on this - as someone finally decided to investigate all the mystery fees listed on the 401K documents. Bottom line is, the average person is paying 2/3 of their savings in fees. You'd be better to keep your money under your mattress. A retired CEO of one of the leading Financial Giants admitted that of course it's set up to benefit the financial agency, or government - NOT you, the taxpayer. Wise up people.

April 25 2013 at 6:43 PM Report abuse +1 rate up rate down Reply

I have a problem with this. If you think everyone should get paid for their service you should not have a problem with the 401K system. If you feel the government can mange your money better than you , invest in government bonds. Just keep in mind 17 trillion in debt.

April 25 2013 at 6:39 PM Report abuse rate up rate down Reply

I have a little problem with this; is as if the government can control your money better than you. If you believe every one should get paiid for their service this should not be a problem. If you really believe the government can mange your money better - go for it . Just think about 17 trillion in debt.

April 25 2013 at 6:36 PM Report abuse rate up rate down Reply

What else would you expect, ,,the government scum are involved......

April 25 2013 at 6:16 PM Report abuse rate up rate down Reply

This whole campaign is a Government Propaganda trick to soften all of we who are invested in our 401K plans and to convince us that a 401K style "Investment" in "Governent Bonds" would better suit our needs. The Administration is launching a campaign to outlaw private 401K Investment and to direct those funds into "SAFE", no fee, governement securities. Given Social Security, do you feel the Government can do a better job than you in investing your hard earned money?

April 25 2013 at 5:08 PM Report abuse rate up rate down Reply