Little things can have a big impact when you are trying to build a nest egg. This is particularly true of investing fees, which can dramatically shrink the size of your portfolio over time.
One of the most overlooked fees sometimes kicks in when you leave your 401(k) account behind with a former employer.
PensionBee, an online provider for personal retirement savings, reports that employers often pick up some 401(k) fees for their employees but stop doing so once the worker separates from the company.
In a recent case study, PensionBee noted that one employer, a major U.S.-based bank, charges a $4.55 monthly maintenance fee to former employees who leave their old 401(k) plans behind rather than rolling them over to an IRA with a new provider or to a 401(k) plan with a new employer.
The bank also charges other fees, such as platform fees or fund/exchange-traded fund fees.
The upshot of all this can be as much as nearly $18,000 lost to fees over a career for a typical worker who meets the following profile:
- “Works for 33 years, changing jobs every three years (12 employers total)
- Has a 5% investment return, minus average 401(k) fees (net return: 4.15%)
- Leaves behind a 401(k) with a $4.55 monthly account maintenance fee every time they switch jobs”
This hefty toll is the result of the fact that the accumulation of fees reduces the saver’s principal, meaning a smaller amount of money compounds over time. The impact is especially bad for workers who leave behind multiple accounts that are subject to such fees.
Of course, it is likely that most savers are not even aware they are being charged the fees, as former employers are not required to disclose them, according to PensionBee. And even those who are aware of the fees may not fully grasp the costly toll that fees can take on investment returns over long periods.
As we have previously noted, merely bumping a fee from 0.5% to 1.5% on a balance that starts at $25,000 and grows at 7% annually can cost your nest egg $64,000 over 35 years.
PensionBee urges workers to be vigilant in looking for these fees and notes that the older an account is, the more fee damage has likely taken place. PensionBee also recommends avoiding these fees by rolling over old 401(k) plans to an individual retirement account or to your current employer’s 401(k) plan.
Despite this recommendation, there can be disadvantages to rolling money out of a 401(k) plan that range from reduced creditor protections to possibly paying even higher fees in the future. So, if you are unsure about which strategy is right for you, consult with a financial advisor.
Add a Comment