NEW HAVEN, Conn. (WTNH) – If you have a 401(k) plan, you are on the right road to retirement, but you could be losing out on tens of thousands of dollars in retirement savings due to fees charged by your employer’s 401(k) plan. Surprised? You’re not alone. Most people don’t realize that 401(k)s come with fees attached. Roger Cowen, owner of Cowen Tax Advisory Group, goes over the do’s and don’ts.
What is the reason for 401(k) fees?
I’m all for investing in a 401(k) especially if your employer matches your contribution – this is free money. But I want you to be educated with your investment. 50% of people participating in defined contribution plans like 401(k)s said they don’t know how much they paid in fees and expenses – according to a study (from LIMRA) When a company offers its workers a 401(k) plan, it usually hires an outside firm to manage it and they charge a certain percentage known as administrative and management fees.
On average, how much are we paying in fees?
The bigger the account, the higher the fee. Most people are spending a few hundred dollars a year. If you do the calculations, the dollars add up over your working years.
1 percent or lower is considered low cost fee. If you have $100,000 in your 401 (k) and you’re paying $1.5%, that’s $1,500 a year. Think about paying that every year – that can really add up.
And get this…According to a study released this year by the Center for American Progress average 401(k) account holder can expect to pay somewhere between $100,000 and $400,000 in fees over the course of a lifetime. That’s a lot of dough being taken out of someone’s retirement account without the person even knowing it!
How do you find out what fees are being charged?
It’s now a lot easier than it used to be. A few years ago, the federal government introduced a new set of rules requiring that plan providers be more transparent about the 401(k) fees they charge. You should have received your 401(k) plan fee disclosures in the mail or a notice of how to find the fee disclosures online. Most people just toss them in the garbage without reading them. I realize they are difficult to read so find someone who can help you. It could be worth it if you are in a plan with high fees.
Q: What can we do to lower the fees?
Do your homework – log onto your account online and check out your fee.
Most 401(k) plans tend to have a few low-fee options. You can save yourself an enormous amount of fees just by picking the right funds.
Now, you may be stuck with the 401(k) your employer provides. Try asking human resources to look into the plan’s fees and seek better options.
When you leave a job to take another one, or, in the case of many of my clients, to retire, that’s a really good time to get rid of the fees. Rather than keep your money in your current fund, take the opportunity to shop around and see if you can find a fund with lower fees and a better history of returns.
If you can’t find a lower cost option with your current plan, then, I recommend you fund your 401(k) in order to receive any employer matching – remember, that’s free money. Then, consider seeing a financial professional if you have additional money to invest. An IRA might be a better option for you.