Dec 28, 2023
During the last 15 years, our industry has seen an unprecedented amount of focus on the reasonableness of fees in 401(k) plans. While such focus is required of every fiduciary for every service provider that is paid from plan assets, it is important to note that the DOL admonishes fiduciaries to “not consider fees in a vacuum.” Why is that? Because the DOL smartly understands what truly impacts retirement income.
The simple calculation below shows that deferral rates, employer match rates and plan performance have the greatest impact on retirement income, and that changes in retirement plan fees have the least—even if they are decreased by 20%.
An Illustration Helps Make This Point Clear: Fees Have Little Impact on Retirement Income
Let’s start with assumptions of a somewhat typical (but hypothetical) employee with an employer-sponsored retirement plan:
We’ll also assume a 2% annual increase for inflation. With these assumptions, simple mathematical projections show a retirement income beginning at $3,983 per month.
Popularized by Mark Twain, as the famous saying goes, “numbers don’t lie.”
Now, let’s go a step further and conduct a sensitivity analysis (a mathematical approach for determining the most impactful item) where we change some variables by the same percentage, in this case 20%. We’ll apply a 20% change to each factor, to determine which variable has the largest impact on this participant’s retirement.
The Bottom Line: While Fees Are Important, Other Factors Drive Retirement Outcomes
The biggest drivers of increased retirement income, as shown in the bar graph illustration above, are the deferral rate, the employer match and the investment performance. Mathematically, even a 20% reduction in fees will likely have a minor impact on the retirement outcomes of participants.
The retirement plan industry would be much better served by focusing on better saving, investing and spending behavior. And that is why Fiduciary Decisions includes the Magnificent Seven as part of our reports for plan fiduciaries.
We Can Help
Please share this Impact of Key Metrics on Retirement Income supplement with plan sponsors, plan advisors and others to encourage them to help retirement plan participants reach their goals.
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