401K Fee Secrets
Did you know that your employer-sponsored 401K plan is able to charge you fees beyond the management fees of the funds that you invest in? It’s the dirty little secret of 401K plans. Up until a few years ago, I had no idea that these 401K fees existed. I was under the impression that my employer covered all fees as a benefit to me. I was wrong.
You need to do your homework on this one, because avoiding unknown fees, when compounded over decades, can have a profound impact on your retirement plans. According to the U.S. Department of Labor 401K fee publication:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
That’s worth repeating (and bolding): 1 percent in 401K fees can reduce your retirement balance by 28%.
Where do these fees come from?
401K Fees Fall into 3 Categories
- Plan Administration Fees
- Investment Fees
- Individual Service Fees
Where can you See your 401K fees?
- Your plan administrator should be able to provide you with a list of fees.
- Your annual account statement should list all associated fees.
- Your 401K should have a summary plan description (SPD) that separates what you pay and what your employer pays. This is given to you when you begin your plan and every 5 years.
Where Am I Going with this?
Not knowing what your 401K is costing you prevents you from taking frugal action. If you know your fees, you can:
- Determine if it makes sense to switch to roll old 401Ks into your present 401K if it’s cheaper.
- Determine if it makes sense to roll old 401Ks into an IRA that may be cheaper.
- Look into the self-directed 401K option, which can help you improve your 401K by limiting fees.
- Determine if it makes sense to just get your employer’s match in your 401K and then work on contributing to a Roth IRA or Traditional IRA instead.
Final Thoughts on 401K Fees
This is definitely a case where a little bit of homework (half an hour or so) can literally shave or add years to your working life. So get motivated to look into this and seek professional advice if you need to!
401K Fee Discussion:
- Did you know that your 401K charged you fees beyond trading fees and mutual fund management fees?
- What kind of fees have you been paying to use your 401K?
- Does this make you want to switch to an IRA?