Mirror, Mirror on the Wall, What’s the Worst Fee of All?

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It seems as though businesses have specialized teams whose only job is to come up with new and outrageous fees to charge us.

We pay ATM fees to banks so we can access our money at night and on the weekend. After spending an arm and leg for an airline ticket, we fork over even more so the plane will carry our bag too. If we need to make a last-minute payment, we may even be charged a convenience fee for the privilege of paying over the phone.

Of all the many fees you pay, which one is the worst? Which one has the most potential to take you to financial ruin? You’ll have to watch Money Talks News finance expert Stacy Johnson in the video below to find out.

Then, keep reading to learn more about that killer fee and how to minimize how much you’ll pay.

The worst offender? 401(k) fees

Of all those bank fees, convenience fees and other random charges we pay, the worst by far are the ones attached to 401(k)’s and other retirement accounts.

While new disclosure rules went into effect in 2012, 401(k) fees are still poorly understood and often overlooked by workers. What’s more, the fees can seem deceptively small even though they have the potential to add up to hundreds of thousands of lost dollars.

Consider this example from the U.S. Department of Labor:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

That adds up to $64,000 less to live on in your golden years, and that’s if your 401(k) has only $25,000 in it. Imagine how much you would stand to lose if you were more diligent about your retirement savings.

Nearly 1 in 4 don’t know about 401(k) fees

It may be news to you that you’re paying 401(k) fees. That’s part of the problem.

According to a 2013 survey by LIMRA, a financial industry organization, nearly a quarter of workers say they don’t pay any expenses or fees for their plan. However, your 401(k) certainly isn’t free, and don’t expect your employer to be picking up the tab for you.

In fact, there can be dozens of fees attached to a 401(k) although they typically fall into one of three categories:

  • Plan administration fees. These are the fees associated with the cost of providing and maintaining your 401(k). They may be included in the investment fees or charged separately.
  • Investment fees. This is the money you pay to have your money managed in an investment fund. These fees are listed on disclosure statements as percentages and often under the heading “expense ratio.”
  • Individual service fees. These final fees are the ones attached to specific transactions and services, such as fees for requesting a loan or reallocating your funds.

While these fees can be thousands of dollars each year, you might never know it because you don’t pay them directly. Instead, they are pulled out of your 401(k) automatically.

Without the pain of having to write a check to the investment firm for managing your account, it’s easy to miss the fact that fees can be a drain on your retirement savings.

3 ways to lower 401(k) fees

To stop the bleeding, you first need to assess the damage. Your 401(k) should provide a fee disclosure statement for your review. Pull it out and take a look at what you’re paying.

The Society for Human Resource Management reports the average total expense for small plans was 1.46 percent in 2012, but fees could be as little as 0.38 percent for some plans. Our advice is, if you’re paying more than 1 percent, it’s time for some damage control.

Try these three ways to limit your fees.

  • Invest in index accounts. Actively managed accounts have the highest fees, but Morningstar data finds they often lag behind index funds in terms of performance. Invest your money in mutual funds tied to stock indexes, such as the S&P 500, to reduce your costs and maybe even increase your returns.
  • Leave your money alone. Every time you transfer funds, you pay a fee. Pretend your 401(k) is a rotisserie chicken and “set it and forget it.” Well, you don’t want to forget it completely, but you shouldn’t be switching funds every time the market hiccups either.
  • Talk to your employer. If you look through your plan prospectus and aren’t impressed with what you see, let your employer know. Ask if they would consider changes that may open up new fund options. Gather a few of your co-workers to approach the human resources department together in order to make a stronger case for your proposal.

Do you know how much your 401(k) is costing you? If not, go find that disclosure form right now. Then, come back to MTN and search for “401(k)” for more advice on how to make the most of your retirement fund.

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