Cut and pasted this from an article about how LOUSY Amercians are about saving for their own retirement. You've all heard me say it before --- fees and expenses can and DO affect your savings over time. Whether it's 20 or 30% really doesn't matter --- those are HUGE numbers over time!
401(k): High costs, poor returns
By far the most common way employees save for retirement these days is through a workplace 401(k), which over the last three decades has supplanted pensions as the employer plan of choice. Here's the problem: As originally conceived, that's not what 401(k) plans were designed to do.
Created in 1978 as a minor part of a major tax law, 401(k) plans were intended to help well-paid corporate executives shelter income from taxation. Congress later decided to expand access to the plans to rank-and-file workers, and even then the idea was for such investments to merely supplement, not replace, ordinary pensions.
Critics point to a number of defects in 401(k) plans. The most serious, some experts say, is that they require individuals to manage their investments, exposing them to risks they lack the expertise to discern. That point was driven home during the financial crisis, when millions of people saw the value of their 401(k) holdings plunge.
"Employees are neither equipped nor trained to handle risk," Webb said.
Another strike is the high administrative, marketing, asset-management and other fees many financial firms charge for 401(k) plans. Hiltonsmith calculates that such fees diminish a person's nest egg by an average of about 30 percent. Webb comes up with a slightly lower figure, saying that relative to a low-cost index fund, an actively managed 401(k) reduces retirees' wealth by about 20 percent.
Notably, meanwhile, higher fees don't add up to better investment returns.
"If the fees on actively managed funds were buying better investment performance, then those fees might be money well spent," Webb said. "But evidence suggests that the average actively managed fund underperforms an index fund."
|