Boost Your Retirement Savings: Avoid 401(k) Fees

by Michael Kling on 20 December 2012 5 comments
Photo: Victor1558

You might not have noticed if your 401(k) plan has been charging exorbitant fees for accounting, record keeping, legal work, management, or for any number of dubious reasons. In fact, 7 out of 10 participants don't know they pay fees to their 401(k) plan provider, according to an AARP survey. When told of the fees, 6 in 10 didn't know how much they pay, and almost a third said they do not feel knowledgeable about the impact fees have on their retirement savings. (See also: How to Make the Most of Your 401(k))

A single fee may not be much, but they certainly add up over time and cut into your hard-earned retirement savings. Fees for a median-income two-earner family can reach almost $155,000 and consume nearly a third of the workers' investment returns over a lifetime, warns Demos, a progressive think tank. According to its calculations, a family with each partner earning the median income for their gender will pay an average of $154,794 in 401(k) fees over its lifetime.

Plan administrators have gotten away with excessive fees because many people don't know about them. Even if you thought to ask, you might have found the information difficult to understand.

That is hopefully changing with new rules from the Department of Labor. Regulations rolled out this year require 401(k) administrators to clearly spell out any fees and expenses for administrative services, such as legal, accounting, or record keeping.

Plan administrators must provide total annual operating expenses as both a percentage of assets and a dollar amount for each $1,000 invested. They also have to provide historical investment returns over the past 1, 5, and 10 years along with returns of similar market indexes for comparisons.

Regardless of the new reporting requirements, you can avoid paying high account fees by following a few simple steps.

Go for Low-Fee Options

Unless there's a good reason to pay a higher fee, pick investment options with lower fees. Aggressive stock funds may do well one year but rarely consistently do better than the overall stock market. Plus, their high fees eat into returns.

ARTICLE CONTINUES BELOW

Use Index Funds

Index funds, which are based on market indexes, have substantially lower management fees than actively managed funds that have administrators picking their stocks or bonds — usually less than 0.5% compared to 1% or more. And more expensive funds don't return more money than index funds over the long run.

Consider IRAs

IRAs offer greater investment choices and often lower costs, although you probably should stick with a 401(k) if your employer matches contributions.

Ask for Options

Ask your human resources department or boss for more low-fee options like index funds.

Beware Special Fees

Watch out for fees for any special features, trading costs, and fees associated with insurance products like variable annuities.

Don't Borrow From Your 401(k)

This may entail a service fee. Borrowing from your retirement fund is generally bad idea anyway and should only be a last resort.

Use Online Tools

Online tools, such as AARP's 401(k) fee calculator, can help you compare costs to other 401(k) providers. If costs seem exorbitant, point that out to your HR department or consider an IRA.

Unfortunately, new rules don't require plan providers to show how costs impact your savings over the years or require them to compare their fees to other plan administrators. The hope is that greater knowledge and increased transparency will increase competition and drive down costs.

0
No votes yet
Your rating: None
ShareThis

comments

5 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Karen

Great post! My nonprofit company has a 403(b) with Franklin Templeton. In the last few months, I started really working on my personal finances, and when I examined my 403(b) more closely, I was really annoyed by the fees! A 5.75% sales commission per deposit, a 2.4% expense ratio, and a 12b-1 fee! Yikes! I really need to tackle this; my company pays 10% of my yearly salary WITHOUT my having to put in anything, so it's a great gig, but those fees are really surprising.

Definitely dig in to your 401(k) and 403(b) info. Shockingly (or not so much!) your company probably isn't giving you the best plan.

Guest's picture

Good tips! It always amazes me how much many HR departments don't care about the fees associated with the 401k plans. At my wife's former employer the plan they offered only allowed quarterly rebalancing as opposed to annual. Of course, most of the funds given access to had fees to get out of them so you would have to pay this 4 times a year unless you wanted to rebalance manually. We just put in the minimum to get the full match and everything else went into an IRA.

Guest's picture

Here is what I can add as a financial professional. The investment fees you pay are a small percentage of the overall fees a plan may have. In most cases, you will have no ways of getting away from them.

Part of your 401k fees goes to pay for professional financial help which your employer is required to provide. Use those resources.

Do your research, not every managed mutual fund is bad, not every index fund is good. Especially over the past few years. Look into the fees on the individual investment options, but look at the net expense, which is after all the fee waivers.

If your employer gives you a match.... take it, even if the fees were 50%, it is still free money that you are getting. If there is no match, then I agree, an IRA or Roth IRA makes more sense as you have more control, however that is assuming you are able to contribute. Secondly, you are limited to the amount of contributions you can make to an IRA. Lastly, 401k's have more provisions for accessing your money if you need it. The only way to take money out of an IRA is through withdrawals.

There is no right or wrong, there is simply what is best for you and your individual situation. Look at all your options, ask your 401k provider, ask your HR. Worst case, shoot me an email and will be glad to answer any questions.

Guest's picture

Unfortunately, a lot of times there's nothing you can do if the fees are surprisingly high. Sometimes you can, though.

I recently had an experience where a person was participating in a 403(b) with lots of fees, so he looked into the system and found out he could switch the plan to a 457 where the fees are more reasonable!

Guest's picture

What more we can do
. Take the free money and run
. Diversify but simplify
. Avoid too much company stock
. Up your ante