Retirement Fees Hurt Savings More Than Market Slump

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BOSTON (TheStreet) — The stock-market crash swiftly dragged down Americans' retirement plans, but fees paid year after year may be more of a drain.

A new service from BrightScope, a year-old site that provides retirement-plan ratings and research, lets plan participants easily figure out how much they're paying in administration and management fees, and the total cost over a lifetime of investing.

BrightScope rates more than 30,000 401(k) plans, spanning 30 million workers with $1.9 trillion in assets. The most highly rated 401(k) plans are offered by United Airlines (Stock Quote: UAUA), Southwest Airlines (Stock Quote: LUV), Charles Schwab (Stock Quote: SCHW), ConocoPhillips (Stock Quote: COP), Chevron (Stock Quote: CVX) and Exxon Mobil (Stock Quote: XOM).

Still, highly regarded plans have fees that could bear scrutiny.

"It is one of the biggest, if not the biggest, issue in the industry," says Mike Alfred, founder and chief executive officer of BrightScope.

The focus on fees is likely to intensify in the coming months. Congress and the U.S. Department of Labor have been working on regulations that would require employers to disclose detailed data about administration and management fees.

Meanwhile, lawsuits are challenging fees charged by plan administrators and mutual-fund companies. On Tuesday, the Supreme Court rejected an appeal of a dismissal of a lawsuit against Deere & Co. (Stock Quote: DE). The initial suit claimed that "unreasonable fees" were charged for investments in the company's $3.1 billion 401(k) plan.

"A lot of people might think, 'Hey, it is only 2% — that is a small amount,' " says Ryan Alfred, co-founder and president of BrightScope. "'But if your expected rate of return is 8%, and inflation is 3%, you've only got 5% of real return for yourself every year, and you are giving up 2% of that. You are giving up 40% of your return every year."

The Department of Labor, in an online advisory about plan fees, provided a similar take. It offers the example of an employee with 35 years until retirement and a 401(k) balance of $25,000. If returns on investments over the next 35 years average 7%, and fees and expenses reduce average returns by 0.5%, the employee will have $227,000 upon retirement even if there are no further contributions. If fees and expenses are 1.5%, he will amass only $163,000, reducing the account balance at retirement by 28%.

BrightScope's free tool, which was launched Tuesday, starts by asking participants for basic information, such as age and income, to assess the impact of fees. Users then identify all their 401(k) accounts, both active and plans from previous jobs. For each plan, individual investment holdings are itemized and fees are reported.

Graphs help illustrate potential income lost from fees. In an example used by Brightscope, a participant paying 1.22% in fees for an old 401(k) plan could potentially save $86,775 in retirement by moving money to a low-cost individual retirement account, or IRA.

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