Monday, January 10, 2011

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 1

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 1

Indulge me for a moment by imagining that I am your financial advisor and I am recommending that you invest your retirement nest egg in a financial product where you would not know exactly how much you’d be paying in fees. Just to be clear, it’s not that there are no fees associated with this investment (there are, and you’ll be paying them) – they just wouldn’t be in plain sight as would normally be the case for similar investment options. Would you follow my recommendation? Of course not! Who would, right? You’d probably tell me I am out of my mind – or at least think it – and then get up and leave.

In that same spirit, let me direct this question to those who own 401(k) plans or other forms of employer-sponsored retirement plans: Do you know how much you are paying in fees for your plan? I mean, do you have even the vaguest idea, you know, in a general sense? I wouldn’t blame you if you don’t have a clue, because roughly 99.99 percent of folks believe they don’t pay any fees, or that there may be fees but their employers cover them. In fact, why don’t you ask around your office or among your friends, family, acquaintances, or even total strangers and find out their thoughts on this subject?

As a financial professional specializing in retirement-income planning, I can emphatically tell you that employer-sponsored retirement plans – 401(k)s, 403(b)s, and the like – are the least transparent when it comes to fees. That statement may give rise to some discomfort because, by default, so many Americans believe (or behave as if they believe) that since these plans are sponsored by their employers, they are all transparent. If you think about it, folks tend to automatically jump on the 401(k) bandwagon, period! It’s offered, so they do it – almost without thinking. Yet how is that any different from the scenario I described earlier?

This absolute lack of transparency should be very frustrating to those who own these kinds of plans. But how can you be outraged if you are not even aware of how much you are being charged to begin with? And yet it happens all the time, because 401(k) statements don’t mention anything about their hidden fees! It’s true! There is absolutely no such information on any 401(k) statement! Go examine yours now to confirm my point.

Is It Even That Big a Deal?

I’ll let you decide that for yourself after considering this simple example.

Let’s say that Jimmy, age 35, just left his previous job for a new one and has $100,000 in his old 401(k). For simplicity’s sake, let’s also assume that he no longer contributes anything to this old account and he earns 7 percent annually. If Jimmy’s 401(k) charges only 0.5 percent in fees annually, his $100,000 will grow to $227,000 at age 70. On the other hand, if the fees were 1.5 percent, Jimmy’s account – the exact same $100,000 – will reach only $163,000 by the time he turns 70. Just that 1 percent difference in fees will shrink his retirement nest egg (and livelihood) by a whopping 28 percent! But I believe the much bigger issue for Jimmy – and 99.99 percent of folks with 401(k)s – is that they don’t have the slightest idea how much their fees are! So how can they knowledgeably assess whether the plan is worth it or is a total rip-off?

Don’t you find it completely preposterous that the very fees (and most of these plans do cost an arm and a leg) that could prevent you from enjoying a financially comfortable retirement, cause you to have to work much longer, or even cause you to run out of money, are not transparent to you?

I believe this is enough revelation for today. In next Monday’s post, I’ll discuss what it will take for you to figure out how much your 401(k) or other employer-sponsored retirement plan is actually costing you. Stay tuned, because you won’t want to miss that!
In the meantime, call us at 301.949.4449 or visit us on the Web to schedule your complimentary consultation to determine how effective - or ineffective - your employer-sponsored plan is for your retirement-planning needs.


  1. SAMUEL! Thank you for doing such a beautiful job explaining something I didn't even know existed. Your blogs are really educational and illuminating. Now I can't wait until next week to see how to figure those fees out myself! GREAT JOB!!!

  2. rjm,
    Thank you! for reading our blog and also for your feedback. I'm looking forward to part 2, too.

  3. I had to Post and share this blog on FaceBook with my friends,cause I think you do such a good Job at explaining "Financial Stuff" and revealing to us "hidden Secrets" about money that a lot of us "common Folks" dont know of. Good Job!!! Keep telling us more.


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