Recent declines in 401(k) fees in both small and large plans benefits all 401(k) investors, but more investors must become more involved in managing their fund expenses if they want to save thousands of dollars more over their investing lifetimes and secure a more financially retirement.
That is the advice from Chuck Epstein, author of the book, “How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves.”
Based on new data contained in the June 2013 edition of the 401k Averages Book, small plan costs fell from 1.47% to 1.46% in 2012, while large plan costs fell from 1.08% to 1.03%. Expenses for small plans were between 0.38% and 1.97%, while large plan expenses ranged from 0.28% to 1.41%.
While these may seem like small decreases, Epstein said that the mutual fund industry fights to increase expenses in basis points, which are one, one hundredths of a percent. As a result, each decrease in expenses is money that is transferred into the accounts of individual investors, rather than into the profit centers of large fund companies and 401(k) plan administrators.
To keep the amount of fees in perspective, Epstein said 401(k) participants pay about $164 million in fees daily to the financial services industry. Commonly, most investors do not even know they are paying these fees or what they are getting in return. Fees are also an essential part of the revenue stream of mutual fund companies. The U.S. Department of Labor (DOL) has identified 17 separate fees that can be charged to individual investors.
Worse, higher fund and 401(k) fees translate into a direct negative impact on any investor’s own bottom line since higher fund expense ratios mean a direct decrease in investor’s returns. This represents a huge potential savings to the nation’s estimated 72 million 401(k) participants, which contain nearly $3 trillion in assets.
Fees Are Critical to Building Future Wealth
On the positive side, containing and managing fees and expenses is the most important factor under an investor’s direct control and must be managed for long-term financial success. To take control over fees, investors should look at the newly-launched DOL fee disclosure regulations now in effect for their 401(k) plans, isolate those funds which carry high expenses and then switch out of more expensive funds into ones offering lower fees.
In most cases, the difference in changing from a more expensive to a lower-cost fund fee will more than compensate for a decrease in any fund investment returns over time, Epstein said. This is because the difference between market return and a fund’s individual return is directly attributable to a fund’s costs. “Fees are one of the most important key investment variables which have to be managed by investors,” Epstein said.
“Investors must become more aware of the inherent friction between their own interests and those of their mutual fund company and 401(k) administrators when it comes to expenses and how those expenses hurt investors,” Epstein said.
The new DOL fee disclosure regulations went into effect in the spring 2012 and should now be available from employers who sponsor 401(k) plans.
About the Book
This book, “How 401(k) Fees Destroy Wealth,” is based on the first-hand experiences of St. Petersburg, Florida-based author and financial professional Chuck Epstein, who spent over 25 years in the financial services industry and written by-lined articles for over 50 publications. He also is the author of “Managed Futures in the Institutional Portfolio (Wiley, 1992) and “The Handbook of Corporate Earnings Analysis” (Wiley, 1995.) His commentary about the fund industry is available on the site, https://theprogressiveinvestor.org, which won an award from the Society of American Business Editors and Writers (SABEW) in 2009.
“How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves,” is available on Amazon for $15.95 and Kindle for $9.95. It is 259 pages, with six charts, a glossary and over 250 footnotes. ISBN 978-1477657997.