How To Avoid High 401(k) Fees
Planning for retirement is one of the most important things that you can do to ensure your future happiness.
People are living and remaining active longer than they ever have before in the United States, making retirement saving a high priority on prudent citizens’ minds. One of the traditionally most popular ways to plan for retirement is a 401(k) plan, but this type of investment is frequently used by plan providers to make a fortune in obfuscated fees.
According to a 2011 AARP study on 401(k) participants, 71 percent of those planning for retirement using this strategy believe that they do not pay any fees. This should sound absurd on its face – every 401(k) involves some fees – but a number of plan providers use creative methods to bundle the cost of their services into investment fees.
These fees may look small, but over the course of a lifetime of saving, they can be extremely significant. According to the U.S. Department of Labor, a 401(k) with an account balance of $25,000 and a 1.5 percent fee will have an account balance at retirement that is 28 percent lower than an identical portfolio with a 0.5 percent fee.
While the all-in fee for a 401(k) plan is generally reasonable – the median is 0.72 percent – small plans with less than $1 million in assets have a median all-in fee of 1.89 percent, according to a 2009 study conducted by Deloitte for the Investment Company Institute. This difference is even more than 1 percent, suggesting a difference in median account balances at retirement of even more than in the above example. So what should you do?
Read the 401(k) Fee Disclosure
MarketWatch suggests that the first thing you do be to read the 401(k) fee disclosure. The Department of Labor requires all 401(k) plans to file a fee disclosure statement that simplifies all of their various charges. The charges you will see are generally connected to investment management, administration and record keeping, though investment management is generally the largest by a significant margin.
Unfortunately, there is no standardized format for these fee disclosure statements, and many seem almost intentionally long and confusing. There should be an adviser’s fee and expenses on the funds in your account, but there may also be other charges, according to the financial information source. For example, a Rule 12b-1 fee functions like a commission for brokers who select a particular mutual fund. There are also numerous sales charges that may be assessed at different points.
Once you are aware of the total in annual fees you are being charged, you can decide whether to stick with your plan or look elsewhere. Generally, you should be paying no more than 1 percent.
There are a number of alternatives to continuing to put money into an account with unreasonable fees. Subtract the total fees from the interest that your 401(k) is accruing to determine how much interest you are actually going to see and measure the resultant amount against any consumer debt you hold. If the interest rate on your car or mortgage is higher than the interest you are making by contributing, for example, it may make more sense to pay down this debt first.
Investing on your own in a traditional or Roth IRA is also an option. While these contributions are made after taxes, withdrawals from a Roth IRA are tax-free at retirement. Traditional IRAs require you to pay taxes at your marginal rate on withdrawals, but allow you to deduct your contributions.
Planning for retirement is one of the most important things that you can do to ensure your future happiness. Take the time to learn about the fees you are being charged. Learn more about 401(k) plans.