Are fees eating away at your 401(k) retirement account?
In the wake of the recession, many people are trying to rebuild their retirement accounts. That can be tough if investment companies charge high fees. A recent "Frontline" special called the Retirement Gamble investigated how fees can eat away at people’s savings.
It’s a subject familiar to Tacoma author Chuck Epstein, who spent much of his career in the commodities and mutual fund industries, and recently wrote a book titled How 401(k) Fees Destroy Wealth and What Investors Can Do to Protect Themselves. Epstein also writes a blog called mutualfundreform.com.
Epstein says the problem with fees boils down to simple math. Just as retirement savings can benefit from compound interest, the effect of fees is like compound interest in reverse. The fees take bigger and bigger chunks out of your savings over time. That’s why the difference between a 1 percent fee and a 2 percent fee can be huge over time.
“Fees are the insidious inside story of the mutual fund industry,” Epstein said. “Most 401(k) investors don’t know what they’re buying, and they don’t really know exactly what they’re getting in return for those daily fees.”
In the "Frontline" special, correspondent Martin Smith interviewedJack Bogle, founder of the low-cost mutual fund company Vanguard. Bogle has long criticized the investment industry for charging high fees.
“It doesn’t take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get,” Bogle said in the documentary. “The money managers always want more, and that’s natural enough in most businesses. But it’s not right for this business.”
Fees can overshadow investors' best interests
While working in the mutual fund industry, Epstein says he became disgusted realizing that investors’ interests often took a back seat to maximizing revenue for the management company. He says there are a number of practices that don’t have investors’ best interests in mind, such as revenue sharing. That’s when investment companies pay fees to brokers to entice them to sell a particular fund over another. That can result in brokers steering investors into more expensive funds.
“Some of the sales practices I felt were not above board, and somebody needed to speak out,” Epstein said.
Last year, the Department of Labor started requiring mutual fund companies to provide better disclosure about fees. Epstein says it’s worth it to investigate how high the fees are that your mutual fund company is charging, and then take action by moving money to lower-fee investments. He did it himself recently.
“I did recently just transfer some money from a full-service broker to a discount broker, and I saved 1 percent in fees,” Epstein said. “For that 1 percent, my broker was my partner for life as long as I owned those funds. He’s not taking any risk, it’s 100 percent my money. He was a nice guy, but is that worth 1 percent over 10 years?”
Look over your portfolio even if you only have a little time to spare
I asked him why he only recently did that if it’s been on his radar for a long time.
“I’m guilty of the same things millions of other people are, too. You put this stuff off. It’s boring, it’s difficult to do,” Epstein said. “But it’s a couple of hours well spent because over 20 years, this is money that can never be recovered, and you’re probably not getting your money’s worth right now.”