Common retirement strategies can erode your savings: Watchdog

A personal annuity account, or IRA, is the dominant retirement account in the United States today. According to Alicia Munnell, director of the Boston University Retirement Research Center, nearly four in ten Americans have one, and as of last year, these The total assets of the account were $ 13.5 trillion. 

However, these retirees lose billions of dollars with high IRA fees when passing a 401 (k) account to a similar IRA account, even if they choose the same basic investment. I am. Pew analysis released last week. 

Pew found that these relatively small differences in charges can snowball to large losses over time. This is especially harmful because retirees usually live on a fixed income. In short, a reduction in the potential retirement savings of workers can have a long-term impact on the standard of living at retirement.

"In total, the amount of retirement savings lost in such rollovers can reach tens of billions of dollars," he said. Reportfound.

Rollover risk

Most IRA investments result from workers laying off and shifting assets from their previous 401 (k) plans.

When someone quits their job with a 401 (k) plan, they have several options.

• Hold funds in the employer's old plan if the employer allows
• If the old 401 (k) exists, in the new employer's plan Move
• Roll over to an IRA
  

Many people like IRA because they can track all their retirement savings at once Choose from a number of locations and investment options Function to do. However, marketing from financial institutions is also heavily supported by the IRA, a government oversight agency discovered in 2013. , The Government Accountability Officehas found

. This is bad news for investors who may suffer from much higher fees from the IRA. Even if the underlying investment products are the same, Mr. Pew discovered.

The difference lies in what is called a shared class. There are various types of investment trust stocks, called classes, depending on whether they are for individual investors or institutional investors. 

Even if all classes of stocks, such as stocks, bonds, real estate and other investments are invested in the same investment basket, different classes may have different functions or services. The underlying costs of marketing may vary. Management and other costs.

Institutional Equity — A class of investment trust stocks that can only be sold to institutional investorsonly — Usually requires a large minimum investment, in some cases 100,000 Requires $ or more and is only available if the employer pools. Personal contributions from many people or to very wealthy individuals. These stock classes have the lowest fees, as institutional investors can throw away more money. 

On the other hand, retail stocks are targeted at individuals and have low or no minimums. However, retail share classes often charge much higher management fees than investor classes. This is a loss that gets worse over time.

In addition, many investors may not understand that they are being charged higher fees. "Price disclosures (for these accounts) are written in a technical way that is difficult for the average consumer to understand," says Pugh. And, like the "Terms of Service" of many online accounts, their disclosures are often unread.

Class differences

However, Pew discovered that price differences can be important.

Equity-based mutual funds usually cost 37% higher for individual investors than institutional investors, but the median cost of bond-based funds is usually 56% higher. .. 

Hybrid funds that invest in both stocks and bonds have the smallest cost difference. However, additional charges are still important, as individual investors have a typical hybrid fund billing cost that is 31% higher.

And rates can add up to tens of thousands of dollars to lost retirement savings to reduce the amount of retirement savings that can deteriorate and grow over time.

"At first glance, the difference may seem small, but over time it can have a significant impact on savings," says Pew. 

In one example provided by Pew, a worker retires at age 65 and has a real 401 (k) balance of $ 250,000, rolling over to the same investment fund in an IRA. Due to the high IRA fees, income in 25 years will be reduced by $ 20,513.

Mid-career workers moving the same $ 250,000 balance from a low-cost 401 (k) to a high-cost IRA could have their account balance reduced by $ 137,630 after 25 years. .. 

"Higher fees impair subsequent profits, so the magnitude of the savings decline is even greater than the magnitude of the fee increase," Pew said.

For young workers moving $ 30,000 from a 401 (k) to an IRA, the higher the IRA cost 40 years later, the less than usual the balance will be $ 64,000.

To delay the decline in workers' post-retirement savings, Pew helps employers keep their 401 (k) in their current location or resist marketing. By doing so, we encourage workers to retire with a 401 (k) rollover. From high-value financial products.