A closer look at 401(k) fees and full fee disclosures…
Your two largest assets when you retire will most likely be your home and your 401(k) account. Imagine buying a house and not being informed of all the factors that might affect your decision. What if it had a leaky roof, was built on an old mineshaft, or was in a depressed area? Obviously, most of us would not purchase a house without that information. And yet, we’ll blindly contribute to our 401(k) accounts without ever reviewing information that may cost us tens or even hundreds of thousands of dollars in savings over our lifetimes!
The Department of Labor established fee disclosure rules in July 2012. Subsequently, a survey conducted by LIMRA Secure Retirement Institute found that 50 percent of retirement participants did not know how much they were paying in fees and expenses. The 2013 survey indicated that four out of 10 participants believe they don’t pay any fees or expenses, while only a small percentage of participants could estimate how much their plan was costing them. They thought they were paying more than 10 percent!
As your parents probably taught you, there’s no such thing as a free lunch. And when it comes to 401(k) plans, many of us accept what we have with no inquiry or investigation as to their true expenses. Recently, Charles Schwab CEO Walter Bettinger called for a transformation of the 401(k) industry by slashing fees and providing participants with objective and customized advice autonomous from the plan’s consultants. In addition, he calculated that by reducing the typical expense from actively-managed funds to index funds, each retiree would add an average of $100,000 to their balance. Participants could then focus on more customized financial planning, rather than simply chasing yesterday’s performance.
Three variables can affect your retirement account balance: contributions, earnings after fees, and time. Contributions to your account and the earnings on your investments will increase your retirement income, while fees and expenses paid by your plan may substantially reduce the growth in your account. But remember that fees and expenses are just one factor to consider when choosing an investment for your 401(k) plan—you also need to consider a fund’s investment performance in relation to the fees charged. However, all things being equal, minimizing the fees and expenses you pay will help you increase your retirement savings.
There are two different fees that can be charged to your 401(k) account:
- Investment fees normally make up the largest portion of your plan fees. A fund in your account can range from an expense of 0.02 percent to 1.5 percent or more. This means you could be paying $0.20 per $1,000 invested up to $15 per $1,000 invested on an annual basis. That may not sound like much, but over 35 years, it would be over $100,000, assuming you invested $25,000 at seven percent and never touched it or added another dime. Pay special attention to hidden fees—such as sales charges, loads, withdrawal fees and surrender charges—as well as fees to transfer between investment options.
- Administrative fees are charged for the day-to-day operation of a 401(k) plan. These include expenses for record keeping, accounting, legal services and trustee services that are necessary for administering the plan as a whole. Sometimes employers pay these expenses; other times, they’re allocated to all participants in proportion to their account balances (that is, participants with larger accounts pay more of the allocated expenses) or charged as a flat fee to each participant’s account.
Your 401(k) plan must provide you with a fee disclosure that will explain any fees or expenses that may be charged to your account: for example, fees for taking out a loan, required minimum distributions, withdrawals or processing a qualified domestic relations order.
With defined benefit plans becoming a thing of the past, you’re probably relying on your 401(k) and IRA balances to sustain you in retirement. Don’t assume that your employer had your best interests at heart when choosing a 401(k) plan—it may have been implemented years ago, and it’s possible no one has ever taken the time to shop around for a better one. It’s up to you to find out what your plan charges. Remember to study the fee disclosure information, and don’t give away your retirement to fees! iBi
Daryl Dagit is a financial advisor with Savant Capital Management. Savant’s Peoria office is located at 7535 N. Knoxville Avenue, Suite C, Peoria, IL 61614.