Having a solid 401k plan in your financial portfolio is one of the keys to a successful retirement. The only problem is that these plans tend to come with a high level of fees. We often excuse those fees as the “cost of doing business,” but that doesn’t have to be the case any more. There are a number of fees that you can reduce or eliminate right now to make sure your 401k is growing the way you already think it is.
71% of 401k holders believe that they’re not paying any fees at all. Plan administrators aren’t hiding the fees that are charged, but they do reduce the amount of notifications that they make. Would you make changes to your 401k plan as often if there was a big notice that said, “MAKING THIS CHANGE WILL CHARGE A $79 FEE?” Most people would just keep their plans the same.
The Median Average of 401k Fees Paid is 0.72%
That doesn’t seem like a lot, does it? For the average 401k that’s worth $1 million, that translates to fees that equal $7,200 per year. That’s more than what most of the world actually earns for the entire year. In practical terms, that means your 401k that made a 10% gain in the last year actually made a 9.27% gain instead.
Here’s the problem: that average is for all 401k plans that exist right now. When plans that are worth less than $1 million are separated from the mix, the percentage of fees jumps to 1.89%. Now that 10% gain you saw is worth 8.11% instead. That’s a sizable amount of money that’s not going back into your plan’s overall worth.
Why is reducing your 401k fees so important? Because a 1% increase in the amount of fees you pay annually though your plan will reduce the amount of your retirement funds by 28% at distribution time. Imagine if you have $1 million at the time you retire. If your 401k fees were 1.5% instead of 0.5%, you’re going to missing $280,000. That’s almost 10 years of a fully funded retirement when the US average retirement income is considered.
What Can Be Done to Stop the Fees?
It takes active management on your part to control the fees in your 401k. If you are actively trading within your 401k, then allow those trades to be long-term in nature if at all possible. You might also want to consider transitioning over to low-cost index funds instead of staying with the traditional mutual funds. Index funds track the market and can have fees as low as 0.20% if you find the right ones.
In a 2010 report from Morningstar, low cost funds beat high cost funds in every data point and at every time period.
Tell your 401k administrator to transition to low cost index funds immediately, take one last hit in fees to do so, and then you’ll be able to watch your wealth begin to grow without the same levels of fees as before. If you maximize the difference and achieve a 0.8% gain in fee costs immediately, then you’ll be saving $0.80 for every $100 invested. That may not seem like much, but for low level investors at the $10,000 mark, it’s an extra $80 that can be used to reinvest into more index funds annually.
Even if the savings wasn’t reinvested, that’s money that adds up. For the $10k investor, it’s an extra $1,600 in the bank at minimum. Go to the $100k investor and that’s $16k in savings. Now hit the million dollar 401k plan and you’ve saved over $150,000… in fees.
Employers Can Help You Out With This
If you have an employer based 401k, then you’ve got two options: request that you become the administrator of your 401k so you can begin making other investments besides stocks, bonds, or mutual funds; or request that your HR department speak with the investment adviser about having a minimum of one index fund for each asset class category. This will allow you to invest into the lower cost funds.
Sometimes investment advisers will object to changes in 401k plan administration when a switch to index funds is requested. This is probably because the adviser is receiving fees for the funds being actively managed, which means you’ve got to get your business and employees out of that situation as soon as possible (or request a change if you don’t have the authority to make the change yourself).
Many people think they must settle for a high cost 401k plan, but that just isn’t true. The average person today doesn’t even realize that they’re paying fees for their retirement plan. That’s why the time for change is now. Take a look at your 401k documentation to see what kind of fees you are paying each year. If you are paying more than 1%, then take a second look at index funds. If you’re paying more than 1.5%, then either slow down on the changes you’re making or think about finding another provider.
Where can you find the fees? Look for the Fee Disclosure portion of your 401k paperwork. There isn’t any standard formats for this disclosure, so you might find it tucked into a tiny corner of the documentation that you receive. Sometimes the Fee Disclosure can be 40 pages long. On many statements, you will find that the fees are charged against your balance as an indirect charge. Don’t get discouraged. Just find out what you’re paying and change things up if you’re paying too much.
As the US Department of Labor says on their website: “You should pay attention to these fees.”
It might seem like a just reward for a job well done to pay 401k fees, but this is cash coming out of your pocket. Reduce your 401k fees today and you could have a lot more cash on-hand when you’re ready to retire.