WASHINGTON -- It's the silent enemy in our retirement accounts: High fees.
And now a new study finds that the typical 401(k) fees -- adding up to a modest-sounding 1 percent a year -- would erase $70,000 from an average worker's account over a four-decade career compared with lower-cost options. To compensate for the higher fees, someone would have to work an extra three years before retiring.
The study comes from the Center for American Progress, a liberal think tank. Its analysis, backed by industry and government data, suggests that U.S. workers, already struggling to save enough for retirement, are being further held back by fund 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," the report, released Friday, concludes.
Most savers have only a vague idea how much they're paying in 401(k) fees or what alternatives exist, though the information is provided in often dense and complex fund statements. High fees seldom lead to high returns. And critics say they hurt ordinary investors -- much more so than, say, Wall Street's high-speed trading systems, which benefit pros and have increasingly drawn the eye of regulators.
Consider what would happen to a 25-year-old worker, earning the U.S. median income of $30,500, who puts 5 percent of his or her pay in a 401(k) account and whose employer chips in another 5 percent:
* If the plan charged 0.25 percent in annual fees, a widely available low-cost option, and the investment return averaged 6.8 percent a year, the account would equal $476,745 when the worker turned 67 (the age he or she could retire with full Social Security benefits)
* If the plan charged the typical 1 percent, the account would reach only $405,454 -- a $71,000 shortfall.
* If the plan charged 1.3 percent -- common for 401 (k) plans at small companies -- the account would reach $380,649, a $96,000 shortfall. The worker would have to work four more years to make up the gap. (The analysis assumes the worker's pay rises 3.6 percent a year.)
The higher fees often accompany funds that try to beat market indexes by actively buying and selling securities. By contrast, index funds, which track benchmarks such as the Standard & Poor's 500, don't require active management and typically charge lower fees.
With stocks having hit record highs before being clobbered in recent days, many investors have been on edge over the market's ups and downs. But experts say timing the market is nearly impossible. By contrast, investors can increase their returns by limiting their funds' fees.
Most stock funds will match the performance of the entire market over time, so those with the lowest management costs will generate better returns, said Russel Kinnel, director of research for Morningstar.
"Fees are a crucial determinant of how well you do," Mr. Kinnel said.
The difference in costs can be dramatic.
Each fund discloses its "expense ratio." This is the cost of operating the fund as a percentage of its assets. It includes things like record-keeping and legal expenses.
For one of its stock index funds, Vanguard lists an expense ratio of 0.05 percent. State Farm lists it at 0.76 percent for a similar fund. The ratio jumps to 1.73 percent for a Nasdaq-based investment managed by ProFunds.
"ProFunds are not typical index mutual funds but are designed for tactical investors who frequently purchase and redeem shares," said ProFunds spokesman Tucker Hewes. "The higher-than-normal expense ratios of these non-typical funds reflect the additional cost and efforts necessary to manage and operate them."
Average fees also tend to vary based on the size of an employer's 401(k) plan. The total management costs for individual companies with plans with more than $1 billion in assets have averaged 0.35 percent a year, according to BrightScope, a firm that rates retirement plans. By contrast, corporate plans with less than $50 million in assets have total fees approaching 1 percent.
Higher management costs do far more to erode a typical American's long-term savings than does the high-speed trading highlighted in Michael Lewis' new book, "Flash Boys." Mr. Kinnel said computerized trades operating in milliseconds might cost a mutual fund 0.01 percent during the course of a year, a microscopic difference compared with yearly fees.