What's the most maddening fee you pay? To check your luggage? Bounce a check? Use an ATM? Not even close.
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?
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, these 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 (or get the information by watching this video): Assume you are an employee with a current 401(k) account balance of $25,000. If returns over the next 35 years average 7 percent, even if you don’t contribute another penny to your account, here’s what you’d have if your account fees were 0.5 percent and 1.5 percent. With fees and expenses of 1.5 percent, you’d receive only $163,000 after 35 years.
|Beginning balance||Annual return||Fees||Balance in 35 years|
That adds up to $64,000 less to live on in your golden years. “The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent,” the Department of Labor says.
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.
Retirement plans are required to disclose how much they charge in fees. (The rules may be different for an IRA.) Even so, many employees believe (mistakenly) that they don’t pay any expenses or fees for their plan. Fees that are expressed as a percentage of your account balance can look small.
However, “a 1 percent difference in fees — that’s literally hundreds of thousands out of [your] retirement account over the course of a lifetime,” Chad Parks, CEO of Ubiquity Retirement + Savings, a company that specializes in low-cost 401(k) plans for self-employed workers and small businesses, tells U.S. News & World Report.
In fact, there can be dozens of fees attached to a 401(k). 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) is required to provide an annual statement showing, among other things, the fees included in the plan. The statement gives help in comparing costs. Pull it out and take a look at what you’re paying.
On average, American workers pay 1 percent of their retirement plan assets in fees, and workers invested in smaller plans pay even more — 1.32 percent in 2013, says the Center for American Progress. But fees can be as low as 0.25 percent, depending on your plan and the investments you select. This graphic from the Center for American Progress shows at a glance the cost to workers of higher fees, including the need to spend more years on the job.
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 show 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: 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. The law requires plan fiduciaries (an employer, usually) to consider fees and expenses when choosing a plan and to operate the plan in the interest of employees. Learn more by calling a federal Employee Benefits Security Administration adviser at 1-866-444-3272.
Do you know how much your 401(k) is costing you? If not, go find your plan’s disclosure form right now. Let us know what you found out and what you did by posting a comment below or on our Facebook page.