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Can $155,000 in 401(k) Fees Be Correct?

Yes--but that doesn't tell us much. 

John Rekenthaler, 11/18/2013

First, a lifetime rollup number is created to impress, not to instruct. None of us has the faintest idea if $155,000 is twice as high as it should be, or three times too high. It could even be too low. It just sounds like a lot, you know.

I can play that game, too.

My wife and I buy a cup of coffee each workday from a local deli. We're disciplined: it's only one cup, only on workdays, and always just the $2 basic cup, none of the frilly drinks. We're 25 years old (for the purposes of this exercise), we'll live for another 60 years, and inflation will grow at a modest 2% annually. The lifetime cost for those daily coffees? $114,000.

In addition, during the 40 years of our working lives, from ages to 25 to 65, we each pay $7 for lunch at that same deli, getting a salad, bread, and a drink. We could instead brown-bag it, which would cost us $3 per meal, but we prefer the freshness of the salad. Our lifetime cost for not packing lunches? An additional $121,000 (again, this figure includes the effect of 2% annual inflation). Between that decision and the morning coffee, we are out $235,000.

From the looks of it, that deli owner has cost us a big chunk of our retirement. She also must be a multimillionaire, as she's collected $235,000 just from us--and we're one of hundreds of her daily customers.

Was that exercise useful? Have you learned more about the true cost of coffee and of eating lunch? Should I circulate this study so that others across the country know the damage that their local delis are doing to them?

Come on. 

Say What? 
Second, even if the study's figure permitted easy interpretation, the derivation of that number would not. Calculating 401(k) balances, and then the fees charged upon them, requires a raft of assumptions. My coffee/lunch example had the virtue of being easy to understand. The final total of $235,000 might be head-scratching, but the extra $4 each workday for the coffees and the extra $8 for the lunches is clear. Not so with 401(k) fees. A mainstream journalist, writing for a mainstream audience, will have great difficulty highlighting and explaining the study's critical choices.  

is vice president of research for Morningstar.

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