The Demos report entitled The Retirement Savings Drain (PDF) should open many 401(k) advocates' eyes when it points out that:
administering the average defined benefit plan, or traditional pension, costs 46 percent less than a typical 401(k) to provide the same benefit level in retirement, largely because of the higher fees and lower investment returns of 401(k)s and the ability of defined benefit plans to pool risk.
Using median incomes and actual average contribution rates, the report reveals that the lifetime costs of 401(k) fees can be as much as $154,794 for a hypothetical two-earner household:
To put that in perspective, that's the average cost of a house in many parts of the country, or more than the cost of a public-university education, including room and board, for two children.
Another key fact reported by Demos relates to relative costs:
In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market. However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds.
The report also asks, "why are fees, which limit Americans' already-scarce retirement savings, still so high?"
The answer is that the market for individual-account retirement savings is neither efficient nor competitive. 401(k) savers and plan-sponsoring employers lack information about the true costs or even existence of retirement plan fees and how they reduce returns.
The Department of Labor's new fee disclosure rules will take effect on 1 July, and may prompt workers into asking their employers difficult questions about their retirement benefit options. Perhaps fewer fund managers will be selected on such criteria as golf vacations for HR directors...
Calling 401(k) fees "a pernicious rip-off," Forbes notes that a nagging and costly question persists:"
Whenever I asked the question "how much are 401k savers being overcharged" over the years, I haven't been able to get a decent answer. The government doesn't really track it and the middleman and your employer don't want you to know.
WSJ previews the sobering news about 401(k) fees:
There are more than 50 million Americans with investments in 401(k) and other defined-contribution retirement-savings plans. They're about to be getting more information about the fees they pay. [...]
Retirement-plan administrators have to provide detailed information to employers by July 1 about the fees they charge. Employers have to share that information with workers in their plans by Aug. 30, and once a year after that. The charges include investment-related fees and fees for administering a plan itself.
Reuters wonders if we should scrap the 401(k) system and start over, looking ahead to investors' reaction "when 401(k) account statements hit their mailboxes this summer:"
A new format mandated by federal regulators will give investors a more transparent view of the fees they pay and a study released this week suggests many will be shocked by what they see [because] fees are not well understood by investors and even plan sponsors.
A recent AARP survey found that 71 percent of retirement savers do not think they pay any investment fees at all.