Many Americans are clueless about how much they're paying to save for retirement and that's a costly problem, say financial professionals.
Americans hold $4.2 trillion in 401(k) plans and $6.5 trillion in IRAs, according to data from the Investment Company Institute cited by The Associated Press
Yet research reveals that most people do not have a solid understanding of the fees and expenses they're incurring on those accounts.
In a recent AARP survey, 65 percent of the participants thought that they were not paying fees at all. And 18 percent admitted they had no idea whether they are charged fees or not.
In addition to finding that 83 percent of the respondents didn't know how much they paid in fees, the AARP survey also found that 54 percent do not understand the impact that fees have on long-term investment performance, MarketWatch
The fees and expenses for 401(k) plans can be put into three categories: plan administration fees, which cover the day-to-day expenses of operating a qualified retirement plan; individual service fees, which are participant-driven and cover things like self-directed account costs, loans and withdrawals; and investment fees, which typically make up the largest portion of plan fees and expenses.
However, the lack of awareness does not protect retirement savers from potentially steep losses.
According to MarketWatch, the Department of Labor illustrates this point using a scenario where a 401(k) has a $25,000 account balance, gets average annual returns of 7 percent and the accountholder is 35 years from retirement.
If fees and expenses whittle away 0.5 percent of the return each year the accountholder will have $227,000 at retirement, but if costs subtract 1.5 percent of the annual return, the accountholder will only have $163,000, a difference of 28 percent.
And earning less money is not the only consequence of high account costs.
"The corrosive effect of high fees in many of these retirement accounts forces many Americans to work years longer than necessary or than planned," a study from the Center for American Progress
It's not just lower level workers whose balance sheets are getting ravaged by account fees and expenses.
Industry experts stress the importance of raising awareness among retirement savers about fees and their potential toll.
"Understand the fees you pay and consider the services and investment performance you get in return. Don't make investment decisions based on fees alone," MarketWatch stresses.
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