Pew study examines 401(k) vs. IRA fees, impact on retirement funds

Workers who move their retirement funds into mutual fund IRAs could get hit with significant unrealized fees that would shrink their savings, potentially impacting the quality of their golden years, according to a new study.

In what it said was first-of-its kind research, The Pew Charitable Trusts highlighted major differences in mutual fund fees in 401(k) plans versus retail IRAs that could cost investors $45.5 billion over 25 years.

Workers typically lose access to their employer-sponsored 401(k) when they switch jobs or retire, rolling their savings into retail mutual fund IRAs. But in doing so they can lose thousands of dollars due to differences in fees.

Differences in fees matter

“Differences in IRA fees matter, especially when IRAs hold most of the nation’s retirement savings,” said John Scott, director of The Pew Charitable Trusts’ retirement savings project. “Americans striving for a secure retirement need clear, accessible information about fees.  As our research shows, tens of billions of dollars are at stake.”

In its report titled “Small Differences in Mutual Fund Fees Can Cut Billions From Americans’ Retirement Savings,” Pew said:

• Households rolled over more than $516 billion dollars in assets in 2018. Higher fees on the mutual fund in the IRA would generate more than $980 million in additional fees in 1 year, and a $45 billion reduction in savings over 25 years.
• Clear, accessible information about fees is needed. The Government Accountability Office (GAO) found that rollover information is often insufficient or too technical and that people leaving plans receive marketing favoring IRA rollovers.

A scorecard compiled by Pew identifying the most expensive and least expensive fees at mutual fund management companies, ranked by each company’s average fund-level asset-weighted expense ratio for both institutional and retail shares, can be found here.

Americans don't save enough

Noting that Americans don’t save enough for retirement, partly because many do not have access to a retirement plan at their job, Scott said the median account balance for those in their late 50s and early 60s is only $89,716.

IRA accounts hold more than $13 trillion in assets, most of which come from rollovers from employer-sponsored plans.

“People generally don’t understand the fees that are associated with their retirement investments,” he said.

According to Pew’s research only 25% of respondents in a survey of people who participated in retirement plan said they had read and understood a disclosure about retirement account fees.

Scott provided an example of a worker in his mid-20s who saved $30,000 in his employer-sponsored 401(k). When he took a new job, he rolled over his funds into an IRA with same equity mutual fund as his previous plan. But the funds in the employer plan charged .9% in annual fees while the same fund in his IRA charged 1.24%. If he had left his money in the 401(k) plan, the total fees over 40 years would have come to $61,000 and his account balance at age 66 would have equaled $507,980.

Rolling over to an IRA would cost the investor more than $76,000 in fees leaving an account balance of $443,333, a reduction of $64,647.

“So this is someone who's kept the same mutual fund but did the rollover, moving from an institutional share class to a retail share class,” Scott said.

Rollover info often insufficient

The PEW report echoes a Government Accounting Office survey that found rollover information is often insufficient or too technical for people to understand, and that people leaving plans often receive marketing material that favors IRA rollovers.

“Now, there is some good news out there,” Scott said. “We've seen an increasing trend among employer plan sponsors, who are helping their older employees via financial wellness programs to make better decisions about what to do with their money.”

Policymakers, he said, might consider making it easier to keep assets and employer plans, or even options that could keep savings in low-cost funds perhaps as a default choice unless the person wants to make a different choice.

“So, certainly making it easier to understand all this information would be a plus,” he said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].