The 401k and other employer sponsored retirement plans like it, have become the primary retirement savings account of choice for millions of americans. According to the US Department of labor there are an estimated 72 million participants in these plans with assets estimated at over $3 trillion. According to recent survey by AARP, 7 out of every 10 workers contributing to a 401k don’t think they are paying any fees. So if you think your 401k is free you’re not alone.
Is this really an employee benefit?
Many people may be incorrectly assuming that these plans are provided to them as a benefit or perk from their employer, however, aside from some small administrative costs, most of the fees and expenses associated with the plan are usually passed along to the individual participants. If you work for a large Fortune 500 company chances are good that the costs you incur inside your 401k are reasonable and not too crazy, however it still isn’t free. On the other hand if you work for one of the millions of small to medium sized businesses, your fees may be double or nearly triple!
Average Annual Total Costs by plan Size
|Large Plans (over $100 million)||.49%|
|Medium plans ($10 million – $100 million)||.87%|
|Small Plans (Under $10 million)||1.41%|
This difference in fees can really add up to a huge difference. Lets look at an example.
Assume you are 40 years old and you contribute $5,000 per year to your employer sponsored retirement account. If you earn an average annual return of 8% before fees and you have one of the lower cost plans your net return after fees will be 7.51%, so after 25 years of contributions at age 65 you would have $340,382. But, if you had one of the more expensive plans, and your net return after fees was 6.59%, (8%-1.41%), your account would only grow to $298,234. Thats a difference of $42,147! If you contribute $10,000 or more to your retirement plans as many people do, these fees could easily add up to over $100,000.
Where can you find the fees?
Good news! According to new rules issued by the Department of Labor in 2012, 401k plan providers are now required to disclose all fees, costs or expenses incurred by its participants. This includes all administrative costs, any individual costs for specific transactions as well as information for the individual investment options available through the plan. The new disclosure document is required to have performance information on each of the investments offered including 1, 3, 5 and 10 year performance, comparison information for appropriate benchmarks and fees and costs specific to each investment.
So what you can do if you’re stuck in a plan with high fees?
• If your plan has a match, you still may want to consider contributing at least enough to capture your full match potential. But you want to think about how long you plan to work for the company, because your money will more than likely be locked up until you separate service, retire or turn 59 1/2.
• You could consider contributing to a Roth IRA instead. Depending on where you set it up you could have virtually unlimited investment options and more ability to find investments that may have lower fees. Of course you need to examine the tax implications of this versus making tax deductible contributions to your 401k. Also you may not qualify for a Roth if your income is too high. (There may be ways around this, check out my article “how to contribute to your Roth IRA even if youmake too much money”) Also, Roth contributions are more limited $5,500 per year if your under 50 and $6,500 per year if your 50 or older. Compared to a 401k that allows $18,000 per year if your under 50 and $23,000 if your 50 or older.
• Self Directed Brokerage Window. More companies are beginning to add this feature within their 401k plans. If your company has this option you may be able to have access to hundreds or even thousands of additional investments not offered through the regular 401k menu. Keep in mind picking investments will generally require more research and effort on your part, and there may be some transaction fees for buying and selling.
• In-Service Withdrawal. Some plans actually allow you to roll over part or all of your 401k to a self directed IRA account even if your still working for the company. With a self directed IRA, just like the Roth, you will likely have virtually unlimited investment options and potential to reduce your fees. Many companies have certain portions of your plan assets that you may be able to rollover, such as employer match money, and many even let you rollover the entire account if your over 59 1/2.
The opinions voiced in this material are for general information only and are not intended to provide
specific advice or recommendations for any individual.
This information is not intended to substitute for specific individualized tax advice. We suggest that you
discuss your specific tax issues with a qualified tax advisor.
1. Carosa, Christopher. “What Is an Appropriate Fee That a 401k Plan Should Pay?” FiduciaryNews.