401(k) Fees Lower than IRA Alternative

401k Plan Fees401(k) fees are lower than IRA options in many cases!  Research has uncovered that 401(k) fees can be lower than IRA fees by a wide margin too.  Rolling over a 401(k) into an individual retirement account (IRA) can significantly erode investors’ savings – to the tune of $45.5 billion over 25 years, according to research from The Pew Charitable Trusts.  That’s because retail IRA fund fees tend to be higher than those charged by 401(k) plans.

In the report, titled “Small Differences in Mutual Fund Fees Can Cut Billions From Americans’ Retirement Savings,” cited recently in Insurance Newsnet, Pew found:

  • Households rolled over more than $516 billion dollars in assets in 2018.  Higher fees on the mutual fund in the IRA would generate more than $980 million in additional fees in 1 year, and a $45 billion reduction in savings over 25 years.
  • Clear, accessible information about fees is needed.  The Government Accountability Office (GAO) found that rollover information is often insufficient or too technical and that people leaving plans receive marketing favoring IRA rollovers.

Pew put together a scorecard showing the most and least expensive fund fees at mutual fund management companies.  The funds are ranked by each firm’s average fund-level asset-weighted expense ratio for both institutional and retail shares.  The scorecard makes it easy to learn 401(k) fees lower than IRA related fees.

Moreover, most retirement plan participants don’t understand that they pay fees for their investments.  Therefore, fees generally don’t play a role in their decisions to roll over retirement assets from a 401(k) plan account to an IRA when switching jobs or retiring, two times when rollovers generally occur. Pew found that just a quarter of respondents to a survey of retirement plan participants said they read and understood the fee disclosure document they received.

John Scott, director of The Pew Charitable Trusts’ retirement savings project, was quoted giving the following example in the article, which drives home the disparity in 401(k) vs. IRA fees and how they can impact retirement savings:

“…a worker in his mid-20s saved $30,000 in his employer-sponsored 401(k).  When he took a new job, he rolled over his funds into an IRA with same equity mutual fund as his previous plan.  But the funds in the employer plan charged .9% in annual fees while the same fund in his IRA charged 1.24%.  If he had left his money in the 401(k) plan, the total fees over 40 years would have come to $61,000 and his account balance at age 66 would have equaled $507,980.

Rolling over to an IRA would cost the investor more than $76,000 in fees leaving an account balance of $443,333, a reduction of $64,647.

‘So this is someone who’s kept the same mutual fund but did the rollover, moving from an institutional share class to a retail share class,’ Scott said.”

More often than not, individual investors are confused by complex rollover information, and many get lured to open accounts by fancy marketing tactics from the IRA companies.  Policymakers can potentially help by making it easier for participants to keep their money in 401(k) plans.  This makes sense, furthering auto portability as a way to transfer assets between retirement plans, or making low-cost funds a default choice for participants seeking to preserve their savings.  Plan sponsors can also do their part by educating participants on rollover options in a simple, easy-to-understand way, including the potential impact of different types of investment fees on their savings.  Yes it is true – 401(k) fees are lower than IRA fees!


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