That leak comes from all the fees that can be levied on your account year after year, writes money columnist Albert Crenshaw for AARP magazine, for everything from money management to record keeping.
Unfortunately, only a handful of workers appears to understand what's going on. According to a poll sponsored by AARP, 83% of workers don't know how much they pay in such fees -- and most do not realize they pay any fees at all.
To assess the toll of such fees, consider the case of a 30-year-old worker with $25,000 in a 401(k) plan. If that account earns 7% and incurs fees of 0.5% a year, without another contribution, the total payout to that worker at age 65 would be $227,000. However, if that same account incurs fees of 1.5% a year, the extra 1% would shave off $64,000, or 28%, of the payout, which would be reduced to $163,000.
But help may be on the way. To offset the effect of information that's too little, scattered all over the place or simply overwhelming (as in fat mutual fund prospectuses), the U.S. Department of Labor has proposed regulations that would require that workers receive clear and complete explanations of the fees imposed on their 401(k) accounts.
In the meantime, pay close attention to your retirement account. While most employers do a good job of insuring that their 401(k) plans are free of unnecessary fees, make sure that your choices are no-load mutual funds, meaning they don't cost you a percentage to get into and get out of. Hidden fees should be spelled out in each fund's prospectus, but you can look online at Morningstar.com or Yahoo.com if you know the ticker symbol of the fund (a five letter combination, usually ending with "X").
In particular, look for the lines labeled "expense ratio," "front-end sales load," "back-end sales load," and "12b-1 fee." There's no need to pay any of the loads, but the expense ratio is necessary, though it can be minimized. However, some plans have funds that are not publicly available.
By Marshall Loeb