Taking advantage of 401k retirement plans after
you start working full time after college is a smart move. Anyone who is in
their mid-20s and contributes a percentage of their income to their 401k — at
least as much as needed to get matching funds offered by
employers — is on the right path to financial freedom. Stay on that
path and boost contributions with every raise or bonus you get. By deliberately
saving you can rest secured in the knowledge that when it’s time to retire,
you’ll be set for life — or will you?
401k Fees Eat Into
You can do everything right — save diligently, nab
the employer match, increase contributions over time — but still come
up short when a chunk of your retirement savings get eaten by high 401k plan
fees and expenses.
Of course you knew retirement plan administrators were
skimming money off the top, right? Few things come free, after all, especially
in the world of finance. With your growing retirement fund and brutal fees,
suddenly your bulging retirement savings become a double-edged sword. Here’s
how much you can expect to pay over time.
401k Fees Can Cost
You Up to $340,000
The average 401k plan charges fees of approximately 1
percent of the assets that are managed, according to a study conducted
by the Center for American Progress. While 1 percent might sound like
a meager amount, those fees are skimming off the top of your retirement savings
year after year. Over time, those fees amount to a lot more than mere pocket
- If you’ve earned a median salary of around $30,000
since you were 25, get nominal raises and retire at age 67, you’ll pay
nearly $140,000 in 401k fees over your lifetime, according to a Center for
American Progress study. That amount is equal to about two and a half years’
worth of earnings for the typical U.S. household.
- Fees add up faster if your income is higher than
most. The study calculated that someone who starts earning $75,000 a year when
they’re 25 ends up paying more than $340,000 in fees in their lifetime.
Here’s another example of how fees and expenses can reduce
the balance in your retirement account from the U.S. Department of
Labor. Assume that you’re an employee with 35 years until you retire and a
current 401k account balance of $25,000. If the returns on investments in your
account over the next 35 years average 7 percent, and your plan takes out 0.5
percent every year, your account balance will come to $227,000 at retirement,
even if you make no further contributions to your account.
Now consider the exact same scenario, but in a plan that
charges 1.5 percent in fees and expenses. At retirement your account balance
will be only $163,000. That additional 1 percent you lose to fees and expenses
reduces your account balance at retirement by a whopping 28 percent.
3 Ways to Fight 401k
Spending the time and energy to hack away at 401k fees is
well worth it, especially since every fraction of a percent you save can amount
to thousands of dollars in your golden years. Here are three places to start:
Funds With Lower Fees: The reason actively-managed mutual funds don’t
perform as well as unmanaged index funds is due to fees. So, determine if there
are funds with lower fees or opt for unmanaged index funds that will perform
comparably without fees.
Your Coworkers and Appeal to HR: Because index funds are among your
best options for low-cost, long-term returns, what can you do if your
employer’s retirement plan doesn’t offer them as a choice? Gather your
colleagues, explain the gross oversight and consider lobbying your company to
add passively-managed options to its lineup. Ask why the company offers a plan
chock-full of funds that will charge high fees yet underperform. Ask them to negotiate
with the 401k plan administrator to add better choices to the plan.
- Beware of
Premixed Target-Date Funds: To the novice investor, target-date funds
make perfect sense. All you have to do is direct your investing dollars to a
single target-date mutual fund and all asset allocation decisions — how
much you have in stocks, bonds, etc. — are made for you based on a
preassigned formula that takes your age and risk tolerance into account. The
option sounds great until you dig deeper. That’s when you’ll discover that many
of these funds, just like their actively-managed counterparts, charge high,
wealth-eroding fees. Such investment options are becoming more prevalent in
401k plans. Because it’s such an easy, hands-off way to invest, people are more
likely to leave their money put for the rest of their careers, completely
unaware of the money they’re sacrificing to cover fees.
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