One of the many things I admire about my husband is that he is very frugal. We met when he was a first-year teacher and he wooed me by telling me that he maxed out his contributions to his retirement account. For the last 25 years, he has continued to scrimp, save and invest wisely so that we can have a comfortable future together. I find that charming.
Most people don't read the mail from their investment manager. But having worked for many years to create policy that helps people save for retirement, I regularly scour the fine print. Reading a letter earlier this year from TIAA-CREF who manages his account, I was stunned to learn that my husband's fees were being raised dramatically. I know that even small changes in fees can make a big difference to our family's retirement security. Over time, modest fees snowball and can cost thousands of dollars.
For decades, the firm charged one fee level for its College Retirement Equity Fund regardless of the size of the school where the customer is employed. That changed on April 24, when TIAA-CREF divided employers into three categories based on the size of their retirement plan. The smallest, which includes my husband's school, saw major fee increases. They were applied across the board, regardless of whether the investment was simple or complex. For instance, the CREF Money Market Fund, which is designed to protect the value of money while earning fairly small returns, saw fees climb from 0.395 percent of assets to 0.610 percent. That 0.215 percent change may look tiny, but it is a 54 percent increase.
My husband's investment in the CREF Money Market Fund cost TIAA-CREF the same amount to administer on May 1 as it did on April 24 before the higher fees went into effect. Yet the fee hike means our costs climbed significantly.
And that reduces returns. Over the last 10 years, the CREF Money Market Fund has earned an annual average of 1.52 percent. At that rate, a $100,000 investment would grow to almost $125,000 in 20 years. However, under the new, higher fees, after 20 years investors would get just over $119,500 -- or $5,500 less. And the higher fees would now consume 11.5 percent of their earnings (compared to 7.6 percent before the fee hike). For larger savings, of course, the loss is magnified.
I am not saying that TIAA-CREF is a bad company or acted unethically. (In fact in 2015, it was even cited as one of the world's most ethical companies.) But its business decision to hike fees negatively affected my family and many others across the country who work for small employers in academia, medicine and research.
Your employer should be watching fees on your behalf. Recently, the Supreme Court ruled unanimously that employers have an ongoing legal responsibility to make sure that retirement plans they sponsor don't have investments with fees that are significantly higher than normal for that type. Plans that keep inappropriate, high-cost investments can be sued for failing to meet their responsibilities.
Previously, employers believed that responsibility did not apply to investments that were part of the plan for over six years. That was a mistake because as financial markets become more competitive, fees tend to decline, and older investment choices often have higher fees. The Court ruling means that employers have a continuing responsibility to monitor fees and make sure that their plans offer competitive fee investments.
If a fee change by one of the most ethical companies can have that much effect on my husband's low-cost investment fund, imagine how badly a less-reputable firm could hurt savers. That is why the Supreme Court decision is so important. It is why employers who sponsor a retirement plan need to continually monitor investment fees, and why we consumers must also. A few hundredths of a percent in fees can cost thousands of dollars by retirement.
So check the fees yourself. Don't just leave it to someone else. Even the best fund managers may do strange things with fees that you only find out about in letters most people don't bother to read.