May 30, 2012 --- Plan fees account for nearly one-third of an
investor’s potential returns, a paper found. ---
A two-income household, in which both
partners earn the median income each year over their working lifetimes, will
pay an average of $154,794 in 401(k) fees and lost returns, according to the
fee model in “The Retirement Savings Drain,” by the research group Demos. A
higher-income dual-earner household, in which the partners earn incomes greater
than three-quarters of Americans each year, can expect to pay an even steeper
price: as much as $277,969.
Demos found the median expense ratio
of mutual funds in 401(k) plans was 1.27% in 2010. Trading costs vary from year
to year, but have been estimated to average approximately 1.2% per year as
The average mutual fund earns 7%,
before fees, matching the average return of the overall stock market, Demos
found. However, the post-fee returns average only 4.5%, meaning that, on
average, fees eat up more than a third of the total returns earned by mutual
Smaller 401(k) plans have higher
average fees than do larger ones. The median expense ratio for plans with fewer
than 100 participants was 1.29%, while in plans with more than 10,000
participants, it was 0.43%.
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