Did your 401k just skim $100,000 from your account?
Taking advantage of 401k retirement plans after you start working full time after college is a smart move. Anyone who is in their mid-20s and contributes a percentage of their income to their 401k — at least as much as needed to get matching funds offered by employers — is on the right path to financial freedom.
Stay on that path and boost contributions with every raise or bonus you get. By deliberately saving you can rest secured in the knowledge that when it’s time to retire, you’ll be set for life — or will you?
401k Fees Eat Into Retirement Savings
You can do everything right — save diligently, nab the employer match, increase contributions over time — but still come up short when a chunk of your retirement savings get eaten by high 401k plan fees and expenses.
Of course you knew retirement plan administrators were skimming money off the top, right? Few things come free, after all, especially in the world of finance.
With your growing retirement fund and brutal fees, suddenly your bulging retirement savings become a double-edged sword. Here’s how much you can expect to pay over time.
401k Fees Can Cost You Up to $340,000
The average 401k plan charges fees of approximately 1 percent of the assets that are managed, according to a study conducted by the Center for American Progress. While 1 percent might sound like a meager amount, those fees are skimming off the top of your retirement savings year after year. Over time, those fees amount to a lot more than mere pocket change.
- If you’ve earned a median salary of around $30,000 since you were 25, get nominal raises and retire at age 67, you’ll pay nearly $140,000 in 401k fees over your lifetime, according to a Center for American Progress study. That amount is equal to about two and a half years’ worth of earnings for the typical U.S. household.
- Fees add up faster if your income is higher than most. The study calculated that someone who starts earning $75,000 a year when they’re 25 ends up paying more than $340,000 in fees in their lifetime.
Here’s another example of how fees and expenses can reduce the balance in your retirement account from the U.S. Department of Labor. Assume that you’re an employee with 35 years until you retire and a current 401k account balance of $25,000. If the returns on investments in your account over the next 35 years average 7 percent, and your plan takes out 0.5 percent every year, your account balance will come to $227,000 at retirement, even if you make no further contributions to your account.
Now consider the exact same scenario, but in a plan that charges 1.5 percent in fees and expenses. At retirement your account balance will be only $163,000. That additional 1 percent you lose to fees and expenses reduces your account balance at retirement by a whopping 28 percent.
3 Ways to Fight 401k Fees
Spending the time and energy to hack away at 401k fees is well worth it, especially since every fraction of a percent you save can amount to thousands of dollars in your golden years. Here are three places to start:
- Select Funds With Lower Fees: The reason actively-managed mutual funds don’t perform as well as unmanaged index funds is due to fees. So, determine if there are funds with lower fees or opt for unmanaged index funds that will perform comparably without fees.
- Gather Your Coworkers and Appeal to HR: Because index funds are among your best options for low-cost, long-term returns, what can you do if your employer’s retirement plan doesn’t offer them as a choice? Gather your colleagues, explain the gross oversight and consider lobbying your company to add passively-managed options to its lineup. Ask why the company offers a plan chock-full of funds that will charge high fees yet underperform. Ask them to negotiate with the 401k plan administrator to add better choices to the plan.
- Beware of Premixed Target-Date Funds: To the novice investor, target-date funds make perfect sense. All you have to do is direct your investing dollars to a single target-date mutual fund and all asset allocation decisions — how much you have in stocks, bonds, etc. — are made for you based on a preassigned formula that takes your age and risk tolerance into account. The option sounds great until you dig deeper. That’s when you’ll discover that many of these funds, just like their actively-managed counterparts, charge high, wealth-eroding fees. Such investment options are becoming more prevalent in 401k plans. Because it’s such an easy, hands-off way to invest, people are more likely to leave their money put for the rest of their careers, completely unaware of the money they’re sacrificing to cover fees.
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. Differences in account size, timing of transactions and market conditions prevailing at the time of investment might lead to different results, and clients might lose money. Past performance is not indicative of future results.