That 401(k) you’ve been counting on for retirement might just have an unwanted feature: excessive fees. Often 401(k) plan participants are unaware of fees...
Fact Checked byMatthew Schwartz, CFP®, CRPC®
That 401(k) you’ve been counting on for retirement might just have an unwanted feature: excessive fees. Often 401(k) plan participants are unaware of fees that could be eating away their savings and potentially forcing them to retire later than they want. Not all 401(k)’s are created equal and depending on the plan, these fees could be in excess of $100,000.
If you didn’t know about fees in your 401(k), you’re not alone. Back in 2011, a study by AARP showed that over 70% of 401(k) participants said they did not pay any fees at all. How have so many people been misguided to this fact? The 401(k) was adopted in 1978 and for nearly 30 years, plan providers of 401(k)s did not disclose fees to participants. In 2012 the department of justice ordered 401(k) providers to disclose all fees in participant’s 401(k)s. This is a great step forward, however the fees are often embedded in fund prospectuses and behind many pages of complicated legal jargon.
401(k) fees can be divided into two categories:
Typically active managed funds have a higher expense ratio compared to passive funds. Actively managed funds hire a fund manager to buy and sell investments to beat a given benchmark yield. The fund manager requires a large salary, and because of their investment activity, could cause trade and tax costs to increase the annual expense ratio. Passive funds track a market weighted index and don’t have a fund manager incurring costs from active trading. This results in lower trade fees, lower taxable events, and much lower fees for you.
These expenses usually add up to an average of 1%, however depending on your plan and investment choices they can range from 0.5-2.5%. This might not seem like a lot, however with compounding interest, small percentages over time add up quickly.
The chart below shows the impact of fees in a 401k with a beginning account balance of $500,000 over 15 years and compounding 7% annual returns.
A 1% increase in fees from 0.5-1.5% would mean you lose nearly $200,000 in account value.
If you’ve determined your expense ratio is not what you’d like it to be, you do have a few options:
Your 401k can be one of your best savings tools for retirement. And it’s up to you to make sure its not eaten away by excessive fees. If you want to have your 401(k) statement scrutinized by a professional for free, get in touch with us.