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#### HOW RETIREMENT FEESCOST YOU

For 6 in 10
Americans
the answer is
No.

Over the course of a lifetime,
an ordinary American can pay
as much as

\$109,407

in retirement fees
to their mutual fund providers

#### Here's How

401(k) fees fall into three main groups.

Administrative
Fees

Asset
Management
Fees

Marketing
Fees

These costs are tallied up and
expressed as a number called

It sounds simple,
but when it comes to the expense ratio,
things aren’t always as they seem...

Let's do some math!

Imagine you have

\$50,000

invested in a
Mutual Fund

Which, in total, earns

5.88%

(gross return)

with an expense ratio of

1.23%

Investors might assume their fees are
calculated by applying the expense ratio
to the amount that's been earned on their
investment (gross return).

\$50,000

+

5.88%

gross return

-

1.23%

expenses

#### So, after one year...

Your retirement money
would earn

\$2,940

And cost you only

\$36.16

In reality, the expense ratio is
applied to the full balance of your account

So instead of paying
\$36.16 in fees
you are actually paying

\$615

And there is one more charge that is
not factored into the expense ratiotrading fees.
This additional layer of costs can effectively double the amount you are paying in fees.

Of course, that may not seem like
much compared against your new
balance...

and you've paid

\$20,603

in fees

#### After 20 years

your retirement savings stand at

\$124,095

but that has cost as much as

\$73,406

in fees

# How Retirement Fees Cost You

by

A 2011 study by AARP found that 71 percent of Americans were not aware that they pay fees to their 401(k) plan provider. When respondents to the survey were told about these fees, 62 percent did not know how much they pay to maintain their account.

The median-income two-earner family can expect to pay as much as \$154,794 over the course of a lifetime in effective total fees, according to a study released by economist Robert Hiltonsmith in the spring of 2012. That amount can consume close to a third of a family's investment returns, according to Hiltonsmith's analysis. Wealthier families -- those earning more than three-quarters of American households -- can meanwhile expect to pay as much as \$277,969, the study found.

Administrative fees cover the cost of providing customer service, as well as other day-to-day expenses, including record keeping, processing transactions, distributing statements and ensuring regulatory compliance.

Asset management fees are applied to the expense of managing and maintaining a plan's assets. These costs typically include payments to portfolio managers, investment researchers and other employees responsible for a fund's investments.

Marketing fees, also known as 12b-1 fees, are one of the more controversial fees paid by investors. A portion of the costs are set aside to provide informational material, such as ads, brochures and other promotional content.

A separate portion of marketing fees are used as payments or rebates by mutual funds to help get their offerings placed on employer 401(k) menus by brokers and plan administrators. As Wall Street Journal columnist Jason Zweig explained the arrangement to FRONTLINE in The Retirement Gamble, "A lot of people use a term like kickback because, in some ways, it is. It's a legal kickback … But it is a sort of 'You scratch my back, I'll scratch yours' kind of arrangement. 'If you sell our funds, you will get a portion of the revenue we earn from selling them through you.'"

Such fees are disclosed in a fund's prospectus, and as many in the fund industry argue, they have helped to provide workers a much broader array of investment options. In 2009, 12b-1 fees cost mutual fund investors \$9.5 billion, according to The Wall Street Journal.

In 2010, the median amount of retirement savings among those between 35 and 44 was \$35,000, according to the Center for Retirement Research at Boston College. Among 45- to 54-year-olds, it was \$70,000. Savings among those closest to retirement, 55- to 64-year-olds, was \$120,000.

A 2011 study by the Investment Company Institute, the investment industry's trade association, found the median "all-in" fee for defined-contribution plans, like a 401(k), was 1.27 percent. Most savers belong to larger plans, however, which carry lower costs. According to the ICI study, savers in those plans paid a median fee of 0.78 percent.

In 2012, the Labor Department passed new rules requiring fuller disclosure about the fees charged on 401(k)'s. Employers must now provide workers an annual disclosure form detailing the fees in their retirement plans. The disclosure forms do not provide a dollar figure for the cost of a plan, but rather a breakdown of the expense ratio for each investment offered in the plan.

Early signs, however, indicate the disclosures have done little to improve employee knowledge. A 2013 survey by LIMRA found that before the statements went out, 50 percent of plan participants did not know how much they paid in fees and expenses. That figure remain unchanged after the notices were mailed.

In 2012, the Labor Department passed new rules requiring fuller disclosure about the fees charged on 401(k)'s. Employers must now provide workers an annual disclosure form detailing the fees in their retirement plans. The disclosure forms do not provide a dollar figure for the cost of a plan, but rather a breakdown of the expense ratio for each investment offered in the plan.

Early signs, however, indicate the disclosures have done little to improve employee knowledge. A 2013 survey by LIMRA found that before the statements went out, 50 percent of plan participants did not know how much they paid in fees and expenses. That figure remain unchanged after the notices were mailed.

Trading fees represent the costs related to the buying and selling of the underlying assets in a mutual fund portfolio. They include brokerage commissions; bid/ask spreads, which represent the difference between what the fund pays for a security and its actual market value; as well as so-called market-impact costs, which occur when a large trade happens to change the price of a security before the transaction can be completed.

Researchers at the University of California, the University of Virginia and Virginia Tech have found that average trading costs can account for 1.44 percent of total assets.

In this example, trading fees work out to an additional \$615, increasing the fund's gross return from 5.88 percent to 7.11 percent. However, it also doubles the effective cost of fees, to 2.46 percent of your initial balance, from 1.23 percent. Taken as a percentage of the gross return, fees work out to 34.6 percent.

While trading costs are not included in the expense ratio, they are detailed in a fund's statement of additional information.

Sources: AARP, Center for Retirement Research at Boston College, Deloitte, Demos, Financial Analysts Journal, Investment Company Institute, LIMRA, Wall Street Journal.

By Jason M. Breslow, Bill Rockwood, Evan Wexler

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