What Your 401(k) Provider Doesn’t Want You to Know

Today’s infographic is from Tony Robbins, and it uses data and talking points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

According to a thinktank report from Robert Hiltonsmith, the additional 401(k) fees can cut down the size of your retirement nest egg by an average of 30% for an average worker earning $30,000 per year (and saving 5%), this ends up being $154,794 over his or her lifetime.

For someone making $90,000 per year, it works out to a whopping $277,000 in 401(k) fees.

Paying to Play

Hidden fees are bad, but this next practice is potentially even worse.

It turns out that most big-name 401(k) providers accept payments from the mutual funds they offer on their plans, as a part of revenue sharing agreements. In other words, many of the funds you get to choose from are not there based on merit – instead, they were the ones that coughed up the money to be there.

Not surprisingly, these tend to be actively managed, expensive funds – some of which even charge a “front-end load” fee of 3% to even buy into.

Why are there so few options to choose from?

• 93% of 401(k) plans carry under $5 million in total plan assets
• These are the small and medium-sized companies that make up most of the economy
• However, they also have the lowest buying power to demand better options for their employees

As a result, most providers offer limited options to their smaller, less lucrative accounts – and the low fee options that are offered are sometimes marked up big time.

For example, one major insurance company offers an S&P 500 index fund for 1.68% annually when the actual cost is 0.05%. That’s a 3,260% markup!

Small Fees Make a Big Difference

How much do these seemingly tiny percentages really hurt savers? More than you think.

Take two people saving for retirement generating the same return – one is charged 1% in fees, and one is charged 2%.

The 1% difference in fees may not sound like much, but through the power of compound interest, it works out to 10 years of extra retirement money!

What to Do About It?

The problems here are systemic, and not any one company is to be blamed. If you want to take action, here’s what you can do:

Examine: Take a look at your plan’s fee disclosures and the expense ratios of mutual funds you’re invested in. If expense ratios are above 1%, you are likely paying too much.

Compare: Look at available fund options and switch to lower fee options if they offer similar levels of performance.

Lobby: If your 401(k) is getting battered by fees, tell your employer. Employers not only have a fiduciary duty to benchmark their 401(k)s, but also to seek the best option for employees.

The journey towards financial freedom is tough enough as it is – and while a 401(k) is a wonderful tool to help you get there, it needs to be used correctly!