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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.
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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.
