For months, we’ve heard it on the news: For the first time, the Department of Labor is requiring 401(k) plan administrators to explicitly inform employers—who, in turn, must inform employees who are plan participants—of all the fees they charge.
The move is a good one for those of us who are relying on our 401(k) as our primary way of saving for retirement. The ruling, which aims to provide better transparency for these types of fees, went into effect this summer and plan participants are now beginning to receive their annual and quarterly reports. And what you’ll learn may shock you. The fact is, those of us with 401(k) plans have been shelling out for everything from trading fees to administration fees.
But merely knowing about the fees won’t help your bank account. Plus, let’s be honest, these reports are lengthy, dense and can be pretty tough to wade through. Relax, once you know what the fees are, you’ll be better able to address them and make the right comparisons and decisions to help determine how to best manage your retirement funds. So, here are a few things to look at as you get over your fee-based sticker-shock and figure out how to take action and take back your money.
The fees associated with 401(k) plans aren’t set in stone. If you buy your own 401(k), avoiding some fees is as easy as finding an alternate product with a lower fee. If you get your 401(k) through an employer, like most people, it’s not quite that simple. You can’t unilaterally change plans, nor should you pull out of the plan completely because of fees. What you can do, however, is talk to your HR or benefits manager. Express your concerns about fees and have some suggestions on alternate plans. The worst thing they can do is say no.
The Value of Index Funds
Sick of bank-busting fees on your mutual fund investments? Consider an Index fund. Index funds are similar to mutual funds in that they are collective investment schemes. But whereas mutual funds are overseen by a manager, index funds are tied to stock indices and require no management. This makes for lower fees. Mutual funds might take as much as 1.5 percent in fees, but index fund fees are much lower: closer to 0.2 percent. These fees are not insignificant: They can account for over $150,000 over the life of your 401(k).
IRA as an Alternative
Another way to cut your fees down is by rolling your 401(k) into an IRA or opening an IRA instead of a 401(k) in the first place. 401(k) plans tend to carry higher fees than IRAs. Plus, IRAs also offer you more options than a 401(k) plan, and are often based on a more conservative investment instrument. Another way to avoid fees with an IRA is early withdrawal. You’ll be paying hefty fees—to the tune of 10 percent, plus any applicable income taxes—if you have to make a withdrawal in an emergency. This is not true of withdrawals from the principal of your IRA.
Leave It Alone
This is one that should hardly need repeating, but we’ll repeat it once again: When you put money in your 401(k) leave it alone. Forget about it. Borrowing money out of your 401(k) is something you should only do as an absolutely last resort. Not only do you generally have to pay the 10 percent fee referenced above, your loan to yourself is also taxed as regular income. Just don’t do it.
Go Big Or Go Home
There’s a rule of thumb when it comes to 401(k) plans: Smaller plans — with fewer participants and a smaller investment portfolio — tend to be more expensive than bigger plans. U.S. News and World Report found that plans with under 50 members paid an average of 1.33 percent in recording fees alone. Compare this with .15 percent on average for plans with more than 500 members. The sheer amount of volume allows such plans to drop fees. This makes bigger plans attractive to people looking to avoiding paying high fees.
Remember, these fees aren’t negligible. They can account for six-figure discrepancies between principal plus interest and what you eventually take home when you’re retired. If you feel like you’re paying too much in 401(k) fees, there’s a good chance that you are. Look around, see what your other options are and make any adjustments that you can.