Guess How Much Your 401(k) Plan Is Costing You in Hidden Fees

WASHINGTON, DC - JANUARY 26:  Internal Revenue...
WASHINGTON, DC - JANUARY 26: Internal Revenue Service Commissioner Douglas Shulman testifies before the Senate Homeland Security and Governmental Affairs Committee January 26, 2012 in Washington, DC. The committee heard testimony on the topic of 'Taxation of Mutual Fund Commodity Investments.' (Image credit: Getty Images via @daylife)

Most plan sponsors and participants believe their 401(k) plan has zero fees. On July 1 plan sponsors must know exactly what fees they paying and to whom. Plan sponsors must reveal these fees to plan participants by September 1, 2012. This will prove to be a real eye opener for all, particularly those with a high account balance. I believe this ‘cash cow’ for the brokerage firms, insurance companies and banks will disappear very soon.

In addition, the report notes that the average mutual fundmatches the average return of the overall stock market by earning a 7% return before fees are factored in. However, once those fees are subtracted, the report notes that these returns fall to 4.5% or about one-third less.Although paying no fees for 401(k) plans and their associated investment options is not realistic, this report does highlight the potential for fee disclosures to begin a serious discussion about what constitutes a reasonable level of fees for 401(k) plans. Once plan fees are out in the open, plan sponsors and plan participants can see what they are paying compared to what they are getting both in terms of investment returns and plan services. If a plan provider’s fees are higher than those of other providers, plan sponsors can shop the plan around more easily to get a better deal for participants. In fact, it may be the plan sponsor’s fiduciary responsibility to do so.

Investment fees for many actively managed mutual funds are unjustified based on their inability to beat the market.

Please comment or call to discuss how this affects you and your retirement plan.

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