Fees and 401(k) s make ugly bedfellows

By Dian Vujovich

If you happen to have missed PBS’s Frontline presentation of “The Retirement Gamble” seek it out.  The info in it about how fees can eat up so much of what you’ve hoped would be a substantial 401 (k) retirement nest egg is staggering.

But before going there, the IRS has just announced the limitations for qualified retirement account contributions in 2014.

In a nutshell, not a ton has changed: The limit of $17,500 is still in place for employees participating in a 401 (k), 403 (b) and most 457 plans and so is the catch-up amount of $5,500 for employees aged 50 and over.  IRA annual contributions remain the same at $5,500 a year. Catch-up for those over aged 50 is still $1000.

That said, changes have been made and  relate to the phasing out of deductions based upon one’s adjusted gross incomes (AGI). So, make sure to consult your tax advisor to see if/how the changes impact you.

Back to “The Retirement Gamble.”

There’s no doubt about it, saving for the decades you’re likely to live past the current retirement age of 65 is a necessity for pretty much everybody. The obvious exceptions, of course, are likely to be the trillionaires, billionaires and those who have already stashed tens- and hundreds of millions of dollars away.

The big take-away from this PBS program?  That long-term investors need to be forever mindful of  the impact that mutual fund fees play in one’s long-term retirement investing plan.

That’s not to say other types of money-management fees don’t matter—they too can be mount up to hundreds of thousands and even millions of dollars over time depending upon the sums managed. But it’s mutual funds where most of a worker-bee employees retirement dollars are going. And, is the one this program highlighted.

So, in addition to Jack Bogle talking about the “train wreck” that’s coming and reminding us of how fees can eat up two-thirds of a nest egg, here’s one dollars-and-cents example of how that wreck can happen:

Example: Have $50,000 invested in a fund; fund has a gross annual return of 5.88 percent or gross return of $2,940; and investor pays 1.38 percent in expenses, or $615.

Throw in the fund’s expense ratio and in 10 years the investor has paid $20,603 in fees; after 20 years, $73,406.  All of which leaves the investor with $124,095 in retirement savings.

Another example: This one  from Bogle and taken from the program’s transcript:

“You compound 7 percent, let’s say as a hypothetical stock market return, and compare it with 5 percent, which is the same stock market return minus 2, and at the end of the investment lifetime, … there’s a gap of 30 percent for each 100 cents the market delivers. You get 30 cents, or 30 percent.”

How’s that for a big “Yikes!”  and  info investors ought not stick their heads in the sand about.

To see “The Retirement Gamble” visit: pbs.org/wgbh/pages/frontline/retirement-gamble.

For John Bogle interview: http://tinyurl.com/bxp2rug .

For retirement expenses fee example: http://tinyurl.com/dx8d7qc