401k Fees, Cataracts & You

Unlike my wife’s, my vision is not perfect.  It all happened during the summer of the 9th grade, when my optometrist confirmed I was near-sighted in one eye.  Worse yet, he added I would not pass the military flight physical, thus ending, before it began, my career of catapulting off the deck of a US Navy aircraft carrier as the pilot of a Mach 2 fighter jet (then, as now, the ultimate adrenalin rush). As a teenager who cut the grass of many military pilots in my neighborhood, a neighborhood close enough to overhear the final approach of those jets at the nearby airbase, I was crushed.  But there was worse to come.

Now well past my 20’s, I don’t have far to look and see what nature has in store for me as my body ages.  My eyes were simply an early introduction to a biological process that allows parts to fail, not dissimilar to the durable goods we purchase at big box retailers.   And there are multiple failure modes.  For instance, in addition to near-sighted and far-sighted conditions, most of us will develop cataracts in our later years, typically after we retire.    

So how might I pay for that surgery in my post-retirement years?  I don’t know what health insurance will look like then or what type of procedures will be allowable under my plan.  (Who does?)  But I am assuming I will need to pick up at least a portion of the health care tab.  And that cash is likely to come out of my 401k.  So as I think about the cost of cataract surgery today and consider the historic rise in health care expenses – on average three to four times the rate of inflation – I wonder whether my 401k is even capable of keeping up with this category of expense.

Starting with some basic assumptions: overall stock market growth (7%) minus inflation (2.5%) leaves me with real 401k growth of 4.5%.  On the other hand, medical expense growth is 8%, and subtracting the same dollar inflation of 2.5% leaves me with 5.5%.  The difference is an annual 1% funding hole that I need to fill with extra deposits.  In table form:

 

Health Care Costs

Stock Market

Growth

8%

7%

Inflation

2.5%

2.5%

Net

5.5%

4.5%

Difference

 

-1%

But we aren’t done.  I also need to include my 401k fees, which average 1.5% annually.  So now, instead of the negative 1% hole, I have a negative 2.5% hole against the growth in health care costs.  My table is therefore adjusted as follows:

 

Health Care Costs

Stock Market

Growth

8%

7%

Inflation

2.5%

2.5%

401K Fees

N/A

1.5%

Net

5.5%

3.0%

Difference

 

-2.5%

Keep in mind this hole is now 150% larger than simply the underperformance of the market relative to growth in health care costs, and solely the result of the fees levied against my 401k funds.

Of course, there are things I can do – invest in lower cost index funds within my employers’ fund lineup, share my concern of excessive fees with my employer, switch employers and join a much larger organization that has the market power to command preferential treatment via a lower 401k fee structure, etc.  More creatively, I could Facebook friend a few ophthalmologists who may give me a discount when and if the time for cataract surgery comes.  Most certainly I will continue to hope my body parts don’t wear out.  And, I suppose if I wait long enough, there will be an app to prevent that. 

(Photo by ex_magician)