401(k) Fees: Get to Know What You Pay and Reduce the Expense
How much are you spending on 401(k) fees? Do you even know you’re paying them? Many of us are oblivious to these costs, but almost everyone with a 401(k) pays them.
Here are a few facts:
- 95% of all 401(k) participants pay fees.
- 64% of U.S. investors think that they don’t pay any fees on retirement accounts.
- Only 27% of U.S. investors know how much they are paying in 401(k) fees.
- The fees can add up to hundreds of thousands of dollars over your lifetime.
If you are among the majority who don’t know what fees you are paying, it’s time to find out and discover what you can do to lower your 401(k) fees. If you have a 403(b) or 457 plan, you’ll want to know this information, too.
401(k) plan fees can range from less than 0.5% to more than 2.0% of the value of your account. The larger the plan, the lower its fees tend to be.
If you’re paying 0.5% to 1.0%, you’re doing fine, though lower is always better: an extra 0.5% makes a huge difference over time.
If you’re paying more than 2.0%, then fees are consuming years that you could be spending in retirement instead of working.
It’s not just the fees that you have to pay that hurt, but also the returns the money you’ve lost to fees could have made over time.
So, let’s say you’re 35 and you’ve accumulated $100,000 in your 401(k). And, you contribute another $10,000 a year for the next 30 years. You earn an average annual return, before fees, of 8%.
As you can see in the chart below, the difference between a 0.5% fee and a 2.5% fee over 30 years of saving and investing is significant. In the example below, there is a $686,739.63 difference.
You would have to save an extra $9,480.71 a year in the 2.5% fee plan to end up with the same amount that the 0.5% fee plan would give you.
|Total annual 401(k) fees||Amount saved by age 65|
Use the NewRetirement Planner to get a personalized projection for how lowering your fees could impact your future account balances. If you think you are paying more than 1% in fees, run a scenario where you increase your rate of return by 0.5-1.5% (representing the reduction in fees) and assess your future balances. You might be surprised by how much reducing these costs can impact your wealth. Then, take steps to reduce your fees in real life.
Learn what fees you’re paying, then figure out if you can lower them without compromising your investment objectives or risk tolerance.
Calculating your 401(k) fees will take patience and persistence.
Here are a few tips:
Read the Prospectus: Start with the prospectus. The U.S. Department of Labor requires that 401(k) providers disclose all fees in a prospectus. You get the prospectus when you enroll in a plan and it is updated every year.
It is not exactly light reading, but it is the key to figuring out what you are paying.
Look for costs like “Expense Ratios,” “Total Operating Expenses,” or “Asset-Based Fees” in the prospectus.
Ask Your Plan Administrator: Your best option is always to ask someone who knows, like your plan administrator or the person in your company’s HR department who deals with 401(k) plans. They should be able to explain the fees that you’re paying and show you where you can find this information.
Try the Summary Plan Description: To learn what you’re paying in administrative fees, check your company’s summary plan description. It should be available in the documents section of your online account or through your human resources representative.
Review Your Account Statements: Your account statements should also have a section showing the fees you’ve paid for that period.
You’ll find the expenses for each investment in a prospectus or fact sheet that you can get through your online account or from your plan administrator or HR department. If you have $5,000 in a fund and its expense ratio is 0.10%, then your cost to hold that fund is $5 a year.
Look at the 408(b)(2) disclosure: You should also receive an annual fee disclosure notice, also called a 408(b)(2) disclosure. If you don’t, ask for it.
Evaluate Individual Investments: look at the fees associated with each investment. Employers are required to share all fees associated with funds so you can make an informed decision. You may have to read carefully, but make no mistake — the fees are listed.
Investment fees should be your biggest concern.
Start by comparing how the investment fees you are paying compare to fees outside of your plan.
To do this you need to find the expense ratio for each investment in your company’s plan. See how these expenses compare to those of similar investments available outside the company’s plan.
For example, if your company offers a Russell 2000 mutual fund, how does its fee compare to that of a Russell 2000 index fund available outside the plan?
Sometimes a plan will have both reasonably priced and terribly priced funds. Changing some of your investments within the fund could give you much better results. You may be able to move your money from an expensive, actively managed fund to an inexpensive, passively managed fund in the same asset class.
An actively managed fund is one where someone is making decisions about how to invest the money. (A passively managed fund, by contrast, simply follows a market index. It does not have a management team making investment decisions.)
As a general rule, actively managed funds are more expensive and do not offer better performance than comparable passively managed funds which, by definition, have much lower fees. The pitfalls of actively managed funds are so well known that 401(k) plan administrators arguably have no excuse for offering them.
If you find that the investments in your plan are expensive, talk to your plan administrator about offering better options. They are legally required to manage the 401(k) in the best interest of the plan participants.
Don’t forget about 401(k)s you have from previous employers. You may find that rolling over those funds can give you better investment options, lower fees, and more control.
Administrative fees will not be within your control to change unless they’re so egregious that you want to lobby your company for lower fees. They also probably won’t be your biggest cost.
However, high administrative fees might tip you off to the presence of other excessive fees in your 401(k) plan.
Most 401(k) plans offer investment advice to participants. Almost all of those that do make this an opt-in service that the individual pays for. You might also be charged a fee if you apply for a 401(k) plan loan.
- The amount of these fees depend on the specific service.
- You may be able to identify these fees in the summary plan description of your plan or on your statement.
Compare the costs for these services to what you might pay outside of your plan.
It all boils down to one thing: The more you pay in fees, the more you’re helping to fund someone else’s retirement instead of your own.
Steve Hansen, Vice President, Underwriting, Architects & Engineers/Contractors Professional Liability, Tokio Marine HCC – Cyber & Professional Lines Group,…