Imagine if someone stole $1,000 from you? I’d bet you’d be rather hot. But what if someone took $155,000. How mad would you be then?
Unfortunately, that’s exactly what’s happening to millions of hard-working Americans. The culprit is excessive 401(k) fees, which siphon vast sums of money away from your retirement savings.
According to Demos, a public policy research organization, an “ordinary” American family—one earning the median U.S. income, contributing the average US contribution to their 401(k) and investing from age 25 to 65—would loss nearly $155,000 over the course of their lifetime as a result of 401(k) fees.
Most Americans, however, don’t even know they are paying fees for their retirement plan.
First, many 401(k) plans are full of actively-managed mutual funds, from which you can select to invest your 401(k) contribution. But these actively-managed mutual funds typically charge hefty fees and seldom return market beating results over the long run.
Second, you’re subject to a host of additional charges that result from just enrolling in a 401(k) plan in the first place. These include advertising and marketing fees along with fees to pay the administrators running the plan.
Since the 401(k) was created in 1984, corporations have quietly phased out their pension plans, shifting the burden of retirement to employees by way of the 401(k). No longer are many of us guaranteed a pension when we retire. This makes it more crucial than ever to pay close attention to your 401(k) fees.
Consider this scenario as provided by the United States Department of Labor:
“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.”
Let’s stress this point again. Under this scenario, enrolling in a 401(k) plan that charges you 1.5 percent in fees vs. a plan that charges only 0.5 percent in fees could cost you 28 percent of your retirement nest egg.
So what can you do to protect yourself from getting fleeced by high 401(k) fees?
Determine if your 401(k) plan is charging excessive fees.
This is your retirement at stake. That’s why it’s important to compare how the fees of your plan compare to 401(k) fees elsewhere. You can use resources like showmethefees.com to obtain a rough estimation of how much you’re paying in 401(k) fees relative to others. You can also talk with your plan administrator and ask if your company’s 401(k) plan has been benchmarked against other 401(k) plans as required by the Department of Labor to ensure employees are not being subjected to excessive fees.
See if your employer will look into changing 401(k) plans.
Your employer has a fiduciary responsibility to ensure that 401(k) participants are not unfairly being taken advantage of. Recently the Department of Labor has cracked down on employers offering fee-excessive plans. In addition, Chevron, CVS, Verizon, Oracle, Prudential and a host of other companies have faced class action lawsuits over 401(k) plan fees and investment choices.
These all provide incentives for employers to search for the best 401(k) plans for their employees. Sometimes all they need is a little nudge from you. The financial experts at the Motley Fool have even penned a sample letter you can submit to your company’s benefits director to prod them into finding a better plan for their employees.
Choose the mutual funds in your plan with the lowest fees.
When picking funds available within your 401(k) plan, try to choose the ones with the lowest fees. This may require a little detective work and maybe some help from your 401(k) plan administrator. Typically index funds, which usually aren’t actively managed, represent your best choices.
Take the match.
If the options in your 401(k) plan are limited to high fee, actively-managed mutual funds and your company is not willing to switch to another 401(k) plan, consider only contributing up to the amount that your employer matches. This employer match is like free money and will often more than offset the high fees associated with your plan.
Consider an alternative retirement vehicle.
If all else fails, consider investing in something other than your company’s 401(k) plan. If you have an especially lousy employer-sponsored 401(k) plan, a traditional or Roth IRA may serve you better.
Due to tax advantages, 401(k) plans often are one of the best options for workers trying to save for retirement. But that doesn’t mean you have to settle for hefty fees that could potential steal tens of thousands of dollars from your nest egg. Take a look at your 401K to make sure you are not being fleeced.
BMWK, how are you protecting your nest egg?