Many Americans find 401(k) plans the easiest way to save for retirement yet many have no idea how much their plan may be costing them. According to a study conducted by the Investment Company Institute, 401(k) plans held an estimated $4.4 trillion in assets across fifty-two million participants. The AARP study showed that 71% of participants thought that their 401(k) was free, something that simply isn’t true.
As per USA Today, Tom Zgainer, CEO and founder of America’s Best investment firm that audits companies 401k retirement plans said, “It’s not really that the fees are hidden, it’s more that they are hiding in plain sight.”
A host of different charges may not sound burdensome on the surface but can seriously eat away at your nest egg.
For instance, say you save $10,000 each year for the maximum 30 years for your retirement account 401(k). If you average 7% returns annually with 0.5% charged in annual expenses, you’ll end up with about $920,000 saved. However, an increase in annual expense to 1.0%, would drop to a little less than $840,000.
Steps you can take to reduce fees
To lower your 401(k) cost, you need to pay close attention particularly the fees charged by your investment choices. These fees are commonly expressed as “expense ratios.” While 1.1% annual fee may sound good at first glance, but it can significantly affect your finances.
According to an investment research firm Morningstar 2015 fee study, a good number to remember for the average expense ratio was 0.64%. There are, however, many funds like low-cost index funds, that offer a significantly lower percentage.
Unfortunately, 401(k) plans typically provide a limited list of funds, and participants are stuck with that menu.
Zgainer or America’s Best 401k said “You are, unfortunately, stuck using the provider your employer has chosen, whether it’s high expense ratio funds or additional asset-based fees layered on, that goes across every participant in the plan. … There’s just nothing you can do about it.”
“The participants do have a voice because an employer is required to do a benchmark of their existing providers on a regular basis,” Zgainer said. “If they can measurably improve the 401(k) for the good of everybody, it has to be a consideration.”
Things to do 5 years before retiring
You can remove high-fee options with similar ones that are cheap.
If you can’t make changes and are stuck with an expensive 401(k) plan, don’t be afraid to move your money to low-cost IRA- the best alternative.
Zgainer said, “A balance to that conversation might be that the employer is providing a company match, and that consideration is a prevailing factor. I would suggest you defer whatever you can to get the totality of the company match and then consider putting any extra dollars you’d have available in an IRA to keep your cost down there instead.”