A new report from Dēmos, "The Retirement Savings Drain: The Hidden and Excessive Costs of 401(k)s," urges Americans to trade in their old 401(k)s for a new, more efficient retirement model.
An "ordinary" American household will pay, on average, nearly $155,000 over the course of their lifetime for their 401(k)s, but over half of workers don't realize how much they're paying in fees, say retirement experts.
- 401(k) fees are high because of the inherent complexity of the system. There are multiple middle men between 401(k) plan participants and their assets which increase the complexity of the system and create additional costs that mainly fall on the backs of invested workers and retirees.
- 401(k) fees are high because of employees' lack of knowledge. Deciphering the complexities of a 401(k) system requires time for employees who are already busy managing the responsibilities of work, family and life. Many workers assume that their employer recognizes this strain and has done all their homework for them and all their investment options safe and relatively interchangeable.
- 401(k) fees are high because of employers' lack of knowledge. Employers offer 401(k)s to their workers because they believe it's good for attracting and retaining skilled employees. However, with little incentive to ensure that they offer their workers the best possible retirement plan, employers are increasingly choosing plans with little or no employer costs but higher expense ratios, passing on the added expense to their employees.
- 401(k) fees are high because of their inefficient market structure. Mutual fund fees are excessive because of the structure of the individualized market itself. The $9.2 trillion that's invested in defined contribution plans, as of 2010, is divided between thousands of different mutual funds in dozens of investment classes. This dispersal actually prevents 401 (k) participants from benefitting from the lower costs and pooling of risk resulting from "economies of scale."
While small changes to the structure of the 401(k) system seem like a simple solution to addressing the inefficiencies of 401(k)s, lower fees will not solve the retirement security crisis awaiting America stemming from the erosion of traditional pensions and the inadequacy of Social Security and private retirement savings funds.
Robert Hiltonsmith of Dēmos says the country should seek new hybrid options like the "Guaranteed Retirement Account" (GRA), proposed by New School economics professor Teresa Ghilarducci for our ailing private retirement system. GRAs share many of the cost-saving advantages of traditional pension systems, including pooling, that drive down excessive fees and provide retirees with guaranteed retirement income.
"Whether through the creation of GRAs or another similarly-featured proposal, one thing is clear: the country's retirement system is in desperate need, now, of reform, so that workers saving for retirement today can be spared from paying the high fees of an inherently broken system" said Hiltonsmith.