Retirement plan fees can be one of the biggest threats to your nest egg, potentially costing the average dual-income household $154,794 over a lifetime of saving.
But it can be hard to fight something we can barely see without a magnifying glass.
Federal regulators have been working at a snail’s pace to make 401(k) plan fees more transparent to consumers. A new web service is hoping to speed things up.
FeeX, an Israeli company that launched this week in the U.S., aims to use the power of crowdsourcing to show savers exactly how much their retirement plan fees are costing them.
“We wanted to deploy a product that gives immediate satisfaction to our users,” said Yoav Zurel, FeeX co-founder. “You can see the damage fees are causing and automatically compare yourself to other people like you.”
How it works:
The site works much like other financial management tools, asking users to link their account by signing into their retirement plan. After a few seconds, the site will present you with a risk meter, telling you what portion of your Individual Retirement Account balance will be consumed by fees by your expected retirement date.
I used myself as a guinea pig. Here's how my Roth IRA fared:
If you’re losing less than 20% of your balance to fees over the life of the plan, that’s considered pretty good. But anything more will land you in the red zone.
In beta testing, FeeX found the average consumer was estimated to lose $52,907 to fees during the course of IRA saving.
The next step is to compare your plan fees to other users on the site (they keep names private but allow users to see which funds others invest in and how much they pay).
Once users have linked their IRA to the site, the site queries investment databases like Morningstar to extract the fee information for their particular funds. So far, FeeX only tracks expense ratios (the cost of the fund itself), but Zurel says they will eventually include administration, asset manager and advisor fees too.
Where they can’t rely on publicly available fee data — some special share classes or versions of funds don’t appear in databases — FeeX relies on users to fill in the gaps and post fee data once they can confirm it.
FeeX doesn't offer the service for 401(k) plan fees yet. That feature is coming soon, Zurrel says.
“We actually started [analyzing] 401(k) fees first, but we understood that at the end of the day a user would be [a] captive of the plan menu his employer chose for him,” Zurel said. “But with an IRA, you can do whatever you see fit. We wanted to start with a product that gave that immediate satisfaction.”
And in fact, IRAs hold the lion’s share of retirement savings in the U.S. Americans had $6.4 trillion in IRAs in 2013, compared with $5.9 trillion in employer-provided 401(k) plans, according to the Investment Company Institute. The ICI (and no other data provider we could find) doesn’t track IRA fees, but FeeX estimates Americans paid $43 billion in fees in their IRA accounts last year alone.
But, do you really need a tool to tell you your retirement fees suck?
We know, we know. FeeX may be free and useful, but it’s yet ANOTHER online tool that requires you to fork over your sensitive financial information in order to use it. We couldn’t even convince Nevin Adams, co-director of the Employee Benefits Research Institute’s Center for Research on Retirement Income, to give it a spin.
“I really hate having to sign on to financial accounts through these kind of third-party tools,” he said. "Talk about risk."
Zurel says user information is kept secure and never shared or sold to other companies. The site is backed by Yodlee, the same financial software company that works with 10 of the largest U.S. banks, including Bank of America and Citibank.
Note that plan holders can see what they’re paying in administrative and annual fees on their own. To find yours, download your most recent statement from your plan administrator’s website. Your expense ratio should be listed in a section labeled “Fund Performance.” Example below:
To see a list of other fees associated with your fund, visit your personal page on your plan’s site and click on the name of the fund you want to see. Look for a tab labeled “fees.”
Know what fees to look for.
No one said retirement planning was fun but it's one of the biggest financial decisions Americans will face in their lifetime. Unfortunately, it looks like we spent less time in the last year planning our IRA investments than choosing a restaurant, flat screen TV or tablet, according to a recent survey by financial services company TIAA-CREF.
Hopefully we can demistify things a bit.
Both IRA and 401(k) administrators charge some form of a fee for holding your account. This is called an administrative fee for a 401(k) and an annual fee for an IRA. It’s usually between 0.2% and 0.4% of your account balance and rarely, if ever, changes.
The expense ratio is different. That’s the fee associated with whatever investment fund you choose. You can compare the average fees for different plans’ funds on sites like Yahoo Finance, Morningstar, or the Financial Industry Regulatory Agency.
As a rule of thumb, expense ratios should be under 1% for a passively-managed index fund. Fees for actively managed mutual funds are typically higher and vary more widely. (On average, 401(k) plan holders who invested in U.S.-based funds paid 0.63% in expense ratios in 2012, according to a June 2013 report by ICI).
Don’t like what you see?
The beauty of IRAs is that you aren’t tied down to any one specific fund, unlike employees who are stuck with whatever funds are in the 401(k) plans their company selected. If you feel like Vanguard's annual and administration fees are too high, you can easily open an IRA with Fidelity instead. (As you shop around for an IRA, keep in mind that your funds' expense ratios are tied to the funds themselves, not the administrator.)
There aren’t any tax penalties for rolling over one IRA into another (so long as the rollover is completed within 60 days), though you may pay a small fee for closing your account.