Employers might not be paying much attention to the fraction of a percentage point in fees that separate many 401(k) plan providers, but they should. Not only can this seemingly minute distinction chip away tens of thousands of dollars from an employee’s retirement savings and force the typical worker to work years longer than they had planned, but it can also cause many employers to essentially throw away between 15 and 20 cents of every dollar they intended to go toward their workers’ retirement.
To understand how this is possible, we must first unpack the real effect of even small differences in fees between 401(k) plan providers. At first glance it may not seem to make much difference if an employer offers their employees a plan charging 1 percent of assets annually — roughly the average among currently available plans — as opposed to a low-fee plan charging 0.25 percent. But over time these seemingly small differences add up to big money.
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Director, Competitiveness and Economic Growth
Senior Fellow; Senior Adviser, American Worker Project