When your retirement money is invested with your company’s 401k, your employer typically pays fees to one or more financial services companies to manage the retirement money and provide different services on behalf of you and your fellow employees. These service providers are paid with your retirement money.
Making matters worse, their fees are often not clearly identified or explained, making it hard to know how much you are paying. And just as often, these fees are simply too high. Way too high. Most employees have no idea how much of their 401(k) retirement savings is getting paid to the financial service companies.
Do the Fees Charged in my 401(k) Really Add Up to a Big Number?
Absolutely. Here’s how the U.S. Department of Labor explains it. Assume you have 35 years until retirement and a balance in your 401(k) is $25,000. You do not deposit any more money in and you earn a 7 % annual return. If fees and plan expenses reduce those average returns by 0.5 percent a year, your balance will grow to $227,000 in those 35 years.
If those fees total 1% higher (1.5 percent total per year), however, you’ll end up with just $163,000, 28 percent less! Imagine having nearly 30% more in your account at retirement without making any changes to the investment portfolio but simply paying 1 percentage point less for fees and expenses.
What Types of Fees Are Charged in a 401(k) Plan and What Amounts are Reasonable?
The most common fees in a 401(k) plan include advisor fees, administrative fees (record keeping) and investment fees. If more than .25-.50 percent of your retirement plan savings is being spent on fees, you may be paying too much.
Businesses that sponsor 401k plans have a fiduciary duty to supervise and closely monitor every aspect of the operation of a 401k plan, including the fees paid to outside service providers and advisors. The lawyers at Meyer Wilson have found that many plan sponsors are not paying close enough attention to these fees, costing plan participants – their own their employees and retirees – many thousands of dollars. And, because the fees are not transparent, the employees and retirees never know that they are losing so much money.
Where Can I Go to Find Out How Much I am Paying in 401(k) Fees?
To find out what fees and expenses are charged to your 401(k) plan you should first ask your plan administrator. You should review a copy of the 401(k) plan’s summary plan description. This document will tell you the fees and expenses of the plan, in addition to other information about the investments offered. The Department of Labor created a summary booklet called “A Look at 401(k) Plan Fees” that you may find helpful.
If you have any concerns about your 401k, we would be happy to do a no-cost evaluation of your plan. Give us a call or fill out our contact form and we will be in touch.