Quantifying the Long-Term Impact of Asset Under Management Fees on Retiree Income and Inheritances

Abstract

The shift from defined benefit plans to defined contribution plans in the private sector has shifted the cost of generating income in retirement from plan sponsors to individuals. As they seek to turn their savings into retirement income, it’s common for retiring plan participants to consider utilizing a financial advisor. Notably, the financial advisor compensation model has changed over time, with many advisors having transitioned from a commission-based practice to an asset under management (AUM) fee-based practice. With Prohibited Transaction Exemption 2020-02, the U.S. Department of Labor has indicated that all financial advisors are acting as fiduciaries when they encourage retiring participants to roll out of their DC plan into an IRA. Fiduciaries are required to act in the best interests of their clients, and they must consider the fees associated with their recommendations as part of the fiduciary process. In this article, I use popular financial planning software to model the impact of AUM fees on retirement income amounts and inheritances. The results indicate that, on average, a 1% fee results in a 15.38% reduction in annual income and a 23.4% reduction in inheritance amounts.