Are high 401(k) fees putting your retirement at risk?

Tom Zgainer discusses how hidden fees can drain money from your account


If you contribute to a 401(k) plan, you’re one of more than 88 million Americans who invest in workplace retirement savings programs — many of whom will rely on the savings from those plans to support them financially in retirement.

In 2015, the Obama administration announced that hidden fees in retirement plans were costing Americans $17 billion per year. HBO’s John Oliver sounded the alarm in a great segment on “Last Week Tonight.”

So what?
According to research from the non-profit National Association of Retirement Plan Participants, approximately 60% of people don’t know they’re paying any fees at all in their 401(k) plan. But they’re wrong! We all pay fees, and over time, those fees can eat away at investments, leaving plan participants with far less money to live on in retirement than if there really were no fees involved.

Low-cost index funds like Vanguard charge between 0.10% and 0.20% in fees. Vanguard’s fees are 0.13% on average, according to their website. That works out to $13 for every $10,000 you invest.

But the dominant providers in the retirement plan space, including many brand-name insurance and payroll companies, often charge 7 to 10 times as much for the same or comparable investments. The difference goes into their pockets — and they get away with it because most of us never bother to do this math.

Compounded over many years of investing, a fee that looks small — for example, 2% of investments — can reduce your total potential nest egg by as much as two-thirds. If two people have the same 7% return over time but one pays 1% in fees while the other pays 2%, the latter will run out of money 10 years earlier.

Last year, the Obama administration announced that hidden fees and backdoor payments were costing Americans $17 billion per year. And that’s not counting the excessive “out-in-the-open” fees that are draining our retirement accounts. “The corrosive power of fine print and buried fees can eat away like a chronic illness at a person’s savings,” said U.S. Secretary of Labor Thomas E. Perez.

Why are the fees so high?
Many retirement plans are plagued with huge commissions, very high expense ratios, and a laundry list of other — often hidden — layers of fees. They might be labeled “asset-management charges” or “contract asset charges.” They often add up to 1% or more and are buried in the fine print of plan disclosures.

On top of that, the majority of retirement plan providers accept payments from the mutual funds offered in the plans they sell to businesses. This is called “revenue sharing” (or, more aptly, paying to play). As a result, the investments you have to choose from in your 401(k) plan are usually the funds that pay the provider the most — these are rarely the best-performing options out there, and they are almost never the lowest in cost.

For example, in a recent 401(k) plan I reviewed, one of the leading payroll companies in the United States receives 0.40% annually in revenue sharing from the company whose mutual funds are included in the plan they offer. This means the payroll company makes 135% more than the actual 0.17% cost of the fund — thanks to its revenue-sharing agreement.

Finally, retirement plan providers often restrict low-cost funds to plans that exceed a certain dollar amount of assets. Since the providers don’t make much of a profit on these lower-cost funds, they mark them up. One major insurance company is offering an S&P 500 index fund for more than 1% annually, when the actual cost is .05%. That’s a 2,000% markup. And because of the aforementioned minimum asset requirements, employees of smaller companies are often forced to invest in funds with higher fees.

What can I do about it?
Often a 401(k) provider is chosen as a matter of convenience — integration with a payroll provider’s offering, for example. More often it is through an introduction, via a colleague or friend who “knows a guy.” Not enough due diligence may have been completed to see the long-term ramifications of the choice or providers, or even related to their expertise. Even though employers have good intentions, they are deeply focused on running their businesses. And they are probably not experts in investing for retirement, or in the 401(k) industry.

So it’s up to you, the employer who sponsors the 401(k) plan, to educate yourself on how your plan works and where your money is going. Look closely at your paperwork. Compare the expense ratios and other fees in your plan documents to those charged for similar investments from other providers. This is tedious, but important.

If you’re concerned about the fees you’re paying, start by completing a thorough benchmark of your plans’ fees to alternatives. You have a legal responsibility to make sure that your 401(k) plan puts your participants’ best interests FIRST, and this benchmark will help you clearly see if a near term change might be in the best interests of all those participating in your plan.

Take action — your financial future, and those of your employees and their families, may depend on it.

Take control, start here:

Tom ZgainerTom Zgainer is CEO and founder of America’s Best 401(k) and has helped thousands of companies repair or rescue their retirement plans over the past 15 years. You can learn more at

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