Retirement Plan Fees Consume 30% of Returns

According to the fee model used for “The Retirement Savings Drain,” published by think tank Demos, a two-earner household, in which each partner earns the median income for their gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns. A higher-income dual-earner household, in which each partner earns an income greater than three-quarters of Americans each year, can expect to pay an even steeper price: as much as $277,969.  

Demos found the median expense ratio of mutual funds in 401(k) plans was 1.27% in 2010. Trading costs vary from year to year, but have been estimated to average approximately 1.2% per year as well.  

The paper says the average mutual fund earns a 7% return, before fees, matching the average return of the overall stock market. However, the post-fee returns average only 4.5%, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds.   

Smaller 401(k) plans have higher average fees than larger ones. The median expense ratio for plans with less than 100 participants was 1.29%, while for plans with more than 10,000 participants, it was 0.43%.