The United States Department of Labor says 72 million Americans are contributing to a 401(k) – and their assets are close to $3 trillion.
If you’re one of those millions, you probably think you don’t pay fees to invest in your retirement account. But odds are you’re wrong. Most 401(k)’s have fees, and you’ve probably been paying them for years – you just didn’t know it.
Nearly all 401(k) plans use mutual funds, and virtually all mutual funds charge fees for everything from administration to management. Why don’t you see them? Because the fees aren’t disclosed as “fees”- they’re skimmed off the top before your results are tallied. For example, say you invest in a stock fund that charges fees totaling 2 percent. This year the fund goes up by 6 percent. The mutual fund company would take their 2 percent, then report that your fund had increased by 4 percent.
But thanks to new rules, a light is about to shine on the fees you’re paying for your 401(k) and it’s non-profit equivalent, a 403(b).
The Labor Department will soon require all financial institutions to start reporting the fees you pay. And by November, you’ll get to see those fees itemized on your statements.
It may seem that this is a tempest in a teapot. After all, who cares about a percent or two in fees? You should. Because over your working life, those seemingly insignificant fees can add up to a Ferrari! To prove it, Money Talks News founder Stacy Johnson went to the local Ferrari dealer to do the video below. Check it out and then read on for more about those fees and the new rules…
Very soon, you’ll receive greater disclosure regarding the exact fees you’re paying. Prepare to be shocked to learn just how many fees you’re paying to lawyers, investment managers, brokers, and consultants.
The types of fees, how much they are, and who’s charging them vary by plan, but here are a few examples you might see:
- Administrative expenses – Any fees you’re paying for record keeping, legal fees, and/or accounting. These fees are either calculated by a flat hourly rate or a percentage based on the assets in the plan.
- Investment management fee – The investment manager of your 401(k) typically takes out a percentage of your plan’s assets to compensate them for making investment decisions.
- Individual expense information – Any fees deducted that are specific to your plan, like fees for taking out a plan loan.
So how much are the fees? As Stacy said in the video, they can top 3 percent. Even if your fee is half of that, it will add up. Here’s another look at the example Stacy gave in the video:
Say you put aside $5,000 a year for 30 years and you earn 6 percent on it. You’re going to end up with just under $420,000. But if you could earn 7.5 percent instead, you’d save $555,000. That extra 1.5 percent in fees cost you $135,000.
And if you want a real-world example, wait. While your financial institution has to give you the fact sheet by August, they’ll also itemize those fee deductions on your quarterly statements by mid-November. That means you’ll see exactly what you’re paying and for what.
What you can do about it
Once you get an itemized list of fees, compare them to your 401(k)’s benchmark performance (also listed on the fact sheet). Do you think they’re too high for what you’re getting? If they are, you have a few options:
- Talk to your employer – Some employers weren’t aware of these fees either. If you’re getting taken for a ride, your employer might be willing to negotiate a better deal – either with their current financial institution or another one.
- Take your business elsewhere – If your 401(k) is sponsored by your employer, you can’t open your own elsewhere. But that doesn’t mean you can’t invest elsewhere. We just wrote a story on how you can start investing with as little as $200. But don’t abandon your work-related plan. These plans offer advantages from tax-deferral to a company match. Don’t get so upset by the fees that you throw out the baby with the bathwater.
- Just wait – Many investment experts think by shining a light on fees, this new ruling will change the way financial institutions operate. When we start seeing what we’re paying, and complaining about it, maybe those doing the charging will think about charging less.