A recent AARP study found that 70% of 401k participants were unaware their plans charged them any service fees at all. Unfortunately, the reality is, plan service providers do charge fees, many of which are hidden from customers. These fees, over the life of your investment, skim off huge amounts of the fund’s gains. In fact, the better the fund does, the higher these fees become, as most are what are called “asset-value based.” Depending on the length of your participation in the plan, these fees can literally cost you hundreds of thousands of dollars in retirement savings. A goal of any 401k investor is to reduce the fees associated with their plan as much as possible.
- read the fee disclosure statement
- review the allocation of your current portfolio
- consider index funds
- ask your employer about Self-Directed Brokerage Accounts
- consider the advantages of Exchange Traded Funds (ETFs)
- assume your 401k funds are fee free
- consider a 1% fee is too small to be concerned with
- sign up for pre-mixed allocated funds
- cash in your 401k when you leave a company
- go it alone
Before coming up with a strategy to reduce fees associated with your 401k plan, you need to know just how much you’re paying in expenses in the first place. Your plan’s sponsor is required by law to send you an annual disclosure statement detailing these costs. Read through it thoroughly and try to determine how much it’s costing you to participate in any given fund. Pay particular attention to the investment fee. If it’s at or over 1%, you are probably paying too much.
The key here is to identify which funds in your mix have the highest fees and assess how they’re performing. There’s nothing worse than paying for a fund manager whose so called “skills” are underperforming the market. See if there are funds with lower fees, or better yet, unmanaged index funds, that are delivering comparable performance, but letting you keep more your money in the plan. It’s the special funds, continuously managed by a fund gurus, that tend to be the most expensive. Are specialty funds or pre-allocated tracks (lifestyle or retirement year mixes) robbing you of your dream years? If you’re not sure, ask a financial advisor or savvy friend or co-worker about your mix.
Index funds require less oversight from a fund manager and therefore have a much lower expense ratio. Many times, these funds outperform a heavily managed portfolio in the same investment sector. See if your company’s 401k plan offers index funds and then consider moving your money out of managed funds and into them. If you can save as much as a half percent in fees, you’ll make out like a bandit over the life of your fund.
Frustrated by the limited menu of fund choices in a company’s typical 401k plan, employees are asking that Self-Directed Brokerage Accounts be offered as well. The SDBA allows you to invest in the funds you find attractive. It’s a great way to build a personal portfolio composed of low-fee or no-fee funds.
If your company offers an SDBA option, consider investing in ETFs, an increasingly popular choice over traditional mutual funds. ETFs offer much lower fees and attractive returns. The savings in fees, over the life of your investment, alone are worth investigating this exciting new investment option.
There’s no such thing as a free lunch, especially in the finance world. Just because your mutual fund choices are listed as no-load doesn’t mean there aren’t fees associated with them. Service providers charge fees for the management of the fund itself, but also, less obvious fees called sub-ta and 12-b administrative fees that take a significant slice out of your retirement savings, year after year.
Over the course of your savings career, the seemingly small fees mutual fund investing extract annually add up to significant amounts. The larger and more successful the fund is, the higher the toll. For the typical 401k investor, that 1% fee generally translates into over a 100k of lost savings – money you won’t see when you retire.
These funds make it easy for the beginner investor. They’re a no-brainer. You hand over your weekly contribution and it’s divided into a pre-assigned portfolio based on your risk tolerance and time left to retirement. Unfortunately, many times these funds come with high administrative fees. Furthermore, participants, now unmotivated to learn more about investing on their own, tend to keep their money in these allocations for the life of their investment careers…losing a lot of money to fees in the process.
If you are laid off or otherwise move on from your company, avoid the temptation to cash in your 401k. You’ll lose a lot of value to taxes and penalties if you do. Instead, see about rolling over the account into a new employer’s 401k plan. Minimally, either keep your funds in the old plan or roll over to an IRA fund. But at all costs, keep your retirement saving vehicle just that – a retirement plan saving vehicle.
If you’re confused about fees, investment choices, contributions amounts and asset allocations there are resources available. If you can’t afford a financial advisor or feel comfortable talking about finances with family / friends, do a little DIY research on the web yourself. There are plenty of informative, basic resources available, including our own site. After reading a few posts, you’ll start catching on to the rudimentary concepts and see that being a DIY investor is not that difficult, and can save you lots of money in the end.
The big enemy to your retirement savings plans is the fees many traditional plan funds charge whether you are aware of them or no. While seemingly small, these fees have significant impact on your savings over the life of your investment. Do an assessment of your current fund portfolio and consider moving out of high fee, heavily managed funds. Index funds tend to have much smaller fees and cover a lot of business sectors with various risk tolerances. Find out if your employer offers a Self-Directed Brokerage Account (sometimes called the Brokerage Window) that will allow you to invest in lower fee funds…including the very low fee Exchange Traded Funds. And if your 401k plan does not currently offer an SDBA option, ask your Human Resource team to consider adding one. Remember, it’s your money and your retirement. Be sure to keep a key eye on your investments and how they’re being handled.