Retirement Savings Accounts: Fees, Expenses, and Account Balances

According to the U.S. Department of Labor, 43% of private-sector employees participated in defined contribution retirement plans, such as those authorized under §401(k) of the Internal Revenue Code, in March 2007. The amount that these workers will have accumulated in their retirement accounts by the time they retire will depend on a number of factors, including the extent to which the expenses incurred to administer the plans are borne by plan participants. For this reason, it is important for participants in 401(k) plans to understand the fees and expenses that they pay and the services that they receive in exchange for paying these expenses. Whether participants in 401(k) plans are able to identify the fees and expenses that they pay has become a topic of interest both to Congress and the Department of Labor. On March 6, 2007, the House Committee on Education and Labor held a hearing on the subject of fees paid by participants in 401(k) plans. On April 30, 2007, the Department of Labor published a notice of its intent to propose regulations that will require plan sponsors to provide clearer and more detailed information about fees and expenses to plan participants. According to the Investment Company Institute (ICI), the average asset-weighted expense ratio for stock mutual funds in 401(k) plans in 2006 was 0.76%. For this report, CRS estimated the effect of expenses ranging from 0.4% to 2.0% of assets on the amounts accumulated in retirement accounts over a thirty-year period by married couples and single persons with high, median, and low earnings who contribute 6%, 8%, or 10% of earnings each year to a retirement account invested in a mix of stocks and bonds. We compared annual expenses of 0.8%, 1.2%, 1.6%, and 2.0% of plan assets to a low-cost “base case” in which annual expenses were equal to 0.4% of assets in the account. The results of the analysis indicate that expenses paid by plan participants can substantially reduce their retirement account balances. Based on the distribution of rates of return in U.S. stock and bond markets over the 80-year period from 1926 through 2005, a median-earning couple who contribute 6% of family earnings each year for 30 years to a retirement account that is invested two-thirds in stocks and one-third in bonds could expect to accumulate $356,434 in constant 2004 dollars if investment rates of return are at the historical median over the investment period and annual expenses are equal to 0.4% of plan assets. With annual expenses equal to 2.0% of plan assets, this couple could expect to accumulate $263,663, or 26.0% less than under the low-cost plan. A median-earning single person who contributes 6% of earnings each year for 30 years to a retirement account that is invested two-thirds in stocks and one-third in bonds could expect to accumulate $187,738 in constant 2004 dollars if investment rates of return are at the historical median over the investment period and annual expenses are equal to 0.4% of plan assets. With annual expenses equal to 2.0% of plan assets, the individual could expect to accumulate $138,344, or 26.3% less than under the low-cost plan. This report will not be updated.RL34213_20071017.pdf: 152 downloads, before Oct. 1, 2020