Do you know — really know — what you pay for your retirement plan? If you do, consider yourself in the minority.
A recent poll found that more than half of Americans (57%) believe they pay “no fees” or “very low fees” for their 401(k) plan at work.
Nearly an additional quarter of respondents said they “don’t know” what they pay.
It adds up to a stunning three out of four retirement savers in the dark about what their retirement plan costs them, year in and year out.
The reality, of course, is that everyone pays fees for retirement investing, and those fees are pretty stiff for many savers.
The average employee working for a small business pays 2.22% per year in plan costs, according to the latest edition of the 401k Averages Book.
As we have heard from our small business owner clients for some time now — and these survey results show — there is a worrisome trend in the financial services industry of investment professionals charging outsized fees.
Unfortunately, many hard-working Americans are not seeing the expected returns on their investments due to high fees associated with their 401(k) retirement savings.
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That’s because fees are taken out of retirement plan balances every three months. The percentage you are charged is based on your total balance, not the investment return.
As a result, even a number like 2% is a far greater portion of your investment return in any given year. It also means that if the stock market
SPX,
is flat for the year your 401(k) balance declines.
That makes fee reduction an important goal for any retirement saver or small business owner looking to keep more of their money working for them, rather than for the plan providers, fund managers or investment managers.
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The very largest U.S. firms, which enjoy economies of scale when it comes to employee services, typically pay 401(k) fees of under 1%.
Getting the same deal from a small business 401(k) plan has been historically difficult — until now.
Thankfully, fundamental changes to the small business 401(k) market have brought in better, more modern approaches to retirement planning. It behooves any business owner to review their plan and to ask their provider if current fees are in line with the market.
More survey findings:
- Impact of COVID-19: Respondents indicated that COVID-19 has had an effect on retirement savings, as 66% of those surveyed have changed their approach to retirement investing as a result of the pandemic, with 62% saving more for retirement as a result.
- Lack of knowledge: Limited understanding of how their money is invested within their retirement account is another common theme, with 51% of those surveyed unsure of the breakdown of their investments between stocks and bonds.
- Investment anxiety: Americans are feeling anxious about their ability to afford a comfortable retirement. If they were able to go back in time, 84% would want to learn more about investing earlier in life, while 89% would want to invest more in retirement accounts earlier in life.
(The results are from a survey Rebalance commissioned a national survey about retirement costs in early February. It included 1,016 U.S. adults between 45 and 75 years of age.)
Scott Puritz is a managing director and investment committee member for wealth management firm Rebalance. Follow Scott on Twitter @ScottPuritz.