A funny thing struck me as I sat there, live, on the CNBC set during “Closing Bell” for a quick banter about “high” 401(k) fees: In the end, retirement plan fees are a lot less important than saving to the plan. This concept is similar to what a 2012 Wharton study showed: Of the four factors analyzed, investment allocation was less important than the three savings components (when you start, how much you contribute, and when you retire).
We've heard of the “tragic” impact an extra 1 percent of fees has on your retirement savings. While derived using mathematically valid formulas, this hypothetical number misses the point. It represents the moral equivalent of complaining about paying half your lottery winnings in taxes. (e.g., why would a “$1 million” winner complain about having to pay $500,000 in taxes when they're still $500,000 richer than they were before they won?)
Don't get me wrong. This is not lame justification for high, inappropriate, or conflicted fees. It's just that most reasonable people already agree plan sponsors should avoid these types of fees. But, at this point, the “high” fee discussion has devolved into some sort of modern day version of arguing how many angels can dance on the top of a pin. Not only are the numbers we're talking about small, but the debate misses a more important point.
Let's get small, first. This fictional “extra 1 percent” the fee haters claim exists probably doesn't in all but the most extreme cases. More so, even if it does, consider it a “tax” on the benefit of getting a similarly hypothetical 8 percent return on investments each year (that would be 2 percent below the long-term average on the return of equity markets). In the simplest terms, that “extra 1 percent” means you're getting 7 percent more a year instead of 8 percent. In other words, you're doubling your money every 10 years instead of every nine years. If you think doubling your money every 10 years is disastrously worse than doubling it every nine years, then, in the words of the comedian who first coined the term “Let's get small,” “Well, excuuuse me!”
More important, that substantial net investment return of 7 percent a year falls meaningless if it's a compounded annual return of 7 percent of… nothing! Yes, the best way to avoid these “awful” fees is to not participate. Is that the right message we want to send to plan participants? Unfortunately, the DOL now mandates we show plan participants “what they are paying” for their 401(k) plan (in reality, in nearly all cases the plan pays the fees, not the participant).
Here's the rigid truth: Employee savings rates are more important than fees. In fact, employee savings rates trump almost everything else when it comes to retirement readiness. Instead of mandated fee disclosure, why doesn't the DOL mandate employees see a retirement readiness calculation based on their current savings rate? Wouldn't that better encourage them to do the right thing? And wouldn't that make mother proud?
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
