How do you know if you are overpaying on your 401k fees?
About one-third of Americans have no clue how much they pay for their employer-sponsored retirement plan, a situation that can affect the entire purpose of saving for retirement.
When it comes to setting aside money for retirement, every little percentage can add up. In fact, one study conducted by the US Government Accountability Office (GAO) revealed that even small amounts could substantially lower retirement savings, much less high amounts. This is why it is important that you have a clear idea of how much your retirement savings plan will cost you before jumping in.
Here’s a guide to understanding the cost associated with your 401(k) plan and identifying and avoiding high charges.
What Is a 401k?
This is a retirement plan that lets you save for your retirement. Employees get this plan as a part of their compensation package. Employers also are expected to match their contributions.
There are two basic types of this retirement program, each with its unique set of tax advantages:
The traditional 401(k) plan.
In the traditional system, employee contributions are subtracted from their gross income before tax. Here, employees are not taxed on monies earned until the funds are withdrawn at retirement.
The Roth plan.
These are retirement plans to which employees contribute after being taxed on their income. As a result, employees are not taxed on monies earned when the funds are withdrawn at retirement.
What Are 401k Fees?
If you register in an employee-sponsored pension plan, your employer may deduct fees out of your paycheck to pay the provider’s costs and commissions. If you are not enrolled, then your employer isn’t allowed to make these deductions.
The interesting part is that these charges may not be stated on your paycheck or W-2. This can make it difficult to notice unless you are keeping an eye out for changes in the fees.
Typical charges are in three categories:
Administrative Fees
Administration fees are usually the first thing that comes to mind when discussing this retirement plan.
These are the costs for maintaining your employer-backed retirement plan. It also covers things like record keeping, data processing, and legal expenses.
Administrative costs are usually in the range of $100 to $200 per person and per year.
Your company may cover the administration charges, or they will be passed on to you as either fixed charges or percentages of your investments made.
Note though that some administration payments are hidden. An example is ‘revenue sharing’ when the mutual fund firm pays the plan administrator a part of the plan assets. As a result, the employer’s administrative fees are reduced or eliminated.
The wrap charge is another undisclosed cost. This is charged to modest plans that are not attractive to fund companies. An intermediary, usually an insurance provider, combines many plans to generate a large enough pool of accounts. Such large accounts will attract mutual fund companies. The insurance firm provides annuity products and charges a wrap fee.
401K administration fees tend to vary from provider to provider.
Investment Fees
This is the money you pay to your pension plan administrator for managing your investments.
For example, the mutual funds’ company may impose a load, an industry slang word for a sales commission. This may be prepaid, in which case it is referred to as a front-end load. Alternatively, it may be paid at the time the shares are sold, which is referred to as a back-end load or redemption fee.
Another form of investment fee is the 12b-1 fee. This is required to be disclosed under Securities and Exchange Commission guidelines. 12b-1 charges represent the mutual fund’s distribution and marketing costs. It also covers broker commissions.
Some payments are borne by the employer, but in most cases, the vast majority of expenses are passed on to the plan’s members (the employees).
Also called the 401K expense ratio, investment fees are likely the most significant amounts you will pay for your pension management.
Individual Service Fees
When you take on optional services from your plan provider, you pay an individual service fee.
Optional services can be investment advice, investment fund loans, or investment execution. Be sure to research the typical charges for these services to ensure that you are not overpaying. You should know where your money is going, whether you are getting a good deal or not.
When you know ahead of time what you will be paying, you can make informed investment decisions. This can save you tons of money over the years.
How To Pay The Right 401k Fees
401k fees are a fixed fact of employee benefits. These amounts can quickly eat away at any available profit. The good news is that by knowing what to look for in a provider, you can get the best rates for your plan.
The following ideas may help.
Figure out what you’re paying
As an investor, it’s important to know what you’re paying for. The total amount you should expect to pay has been explained in the previous section. However, to get a better picture of your nest egg, it is a good idea to request a breakdown of these 401 k fees and expenses every once in a while.
Ask questions — Are there any hidden fees?
You might think that you’re getting a great pension plan, but surprise! there could be hidden charges that you don’t know about. These can add up to a lot of money. In fact, hidden charges are often 1.5–2% of your hard-earned money each year.
While these costs are not advertised, they may be written in documents that you may not read. So, to discover these hidden costs, you have to dig down inside the documentation. You should also ask questions about every item you are not familiar with or understand.
Compare multiple providers.
One great way to determine a good employer-backed pension scheme is to compare multiple providers. Compare what you are paying against other providers to see how you stack up.
Use a good 401k fee calculator to compare the total costs you pay for the services you will be getting. The results should include a breakdown of all administrative and investment expenses.
Additionally, you can use an independent platform like BrightScope to find good providers. They are not paid by the companies listed, so you can count on the comparison being objective.
Talk with your employer
Expensive retirement savings plans can eat into your retirement assets, depleting them by as much as 28 percent. So, if your company’s pension plan provider is charging high, you can speak with your human resources manager. There’s a good chance that your company can assist you in obtaining retirement plans at reasonable rates.
Final Thoughts
What is a good fee for a 401K? This is one question you should answer to make the most of your investment.
Paying attention to the charges you pay is critical to the success of your retirement portfolio. This is an area where many people get taken advantage of — and it’s also one where you can do something about it.
It pays to ask questions about this area of financial planning. Doing so can mean discovering some hidden savings for your nest egg.
Hopefully, this guide has helped you better understand what you should be looking for when evaluating average 401k fees and how much you should be paying for the investment services you are getting.
