Despite what some investors might think, 401(k) plans aren’t free.
In fact, it’s just the opposite. 401(k) plans are loaded to the brim with fees, including front and back load fees, 12b1 fees, and investment management expenses. Hey, you can’t expect the Fidelity Investments and Vanguard Funds of the world to manage billions of dollars in 401(k) plan money out of the goodness of their hearts.
One problem is some 401(k) fund fees are so high, they can significantly impact fund performance. Another is that many 401(k) plan participants don’t hold a clue on fees, with an alarming amount of retirement savers unaware of plan fees at all.
[See: How to Max Out Your 401(k) in 2017.]
According to Betterment for Business, a 401(k) service provider, 25 percent of so-called “savvy” participants believe there aren’t any fees in their 401(k) plan. Additionally, another 14 percent of investors were unaware of the fees they paid, and 40 percent expect to pay less than 1 percent in of their total 401(k) plan assets all the way through to retirement.
How much damage can high 401(k) fees do to a career professional’s retirement savings? Plenty, as it turns out.
Data from Demos states that “fees can cost a median-income two-earner family nearly $155,000 and consume nearly one-third of their investment returns.”
“The worst 401(k) fees are the fees that are unseen,” says Andrew Meadows, vice president of brand and culture at Ubiquity Retirement and Savings in San Francisco. “While providers are now required to provide reporting on asset-based fees, many don’t proactively check to ensure their retirement savings aren’t being eroded.”
Additionally, education should always be available for savers to know all costs associated with their retirement plans, Meadows adds.
“A common misconception is that a participant’s 401(k) is free to them, but that’s not usually the case,” he says. “Knowledge on this can be powerful and assist in making personal savings more secure.”
The good news is there are ways 401(k) plan participants can fight back, and reduce those onerous plan fees.
Add an investment advisor. Zachary Welborn, a money manager with Manske Wealth Management in Houston, says retirement savers should check with their employers and ask if there is a “fee conscious” investment advisor attached to their 401(k) plan.
“A 3(21) fiduciary investment advisor can offer a number of solutions to lower the overall fees related to offering and participating in a 401(k) plan,” Welborn says.
“The investment advisor should be reviewing the plan’s investment lineup at least quarterly. While the average expense ratio for an equity fund is around 1.25 percent, any advisor that has done their due diligence should have no problem finding funds that can achieve the same goal for a lower fee.”
Use index funds. Welborn says index funds are a “great way” to capture a large piece of the market without having to pay steep investment costs.
“Fees as low as 0.2 percent and 0.5 percent are normal (as opposed to the 1.25 to 2 percent for many funds),” he says. “The management fees at the fund company level are significantly lower as tracking an index requires far less management and resources.”
[See: 9 Psychological Biases That Hurt Investors.]
Bypass professionally sponsored funds. Andy Yadro, a financial advisor with Googins Advisors in Madison, Wisconsin, says if your 401(k) plan has a professional management option, you should always turn it down.
“There is rarely any value added that would justify the fee,” he says. “I recently saw a plan where that service was offered for an additional 75 basis points, and the employees were essentially placed into a target-date fund, which they could have selected on their own for free.”
Yadro says a great way to address the issue of high fees with your employer is by volunteering to do all the legwork. “Offer to reach out to a few local financial advisors and see if they have any lower-cost solutions,” he says.
Shop around. Deborah Sweeney, chief executive officer at MyCorporation, a document filing service in Calabasas, California, says her firm saved money by beating the bushes to find a lower-cost 401(k) plan.
“Our company recently recognized ever-increasing fees in our growing 401(k) accounts,” she says. “We shopped around to find the best, least expensive option.”
Sweeney says there are “many companies” fighting for your business and who will provide you with good data so you can make a better, more informed, less expensive decision on your 401(k) plan. “We were able to get significant savings without much hassle,” Sweeney says. “In fact, we cut our expenses from $22,000 in annual fees to $8,000, which was a significant savings for us.”
Talk to your employer. Ask your employer what benefits are available to you, Meadows says.
“Does your plan offer brokerage accounts, Roth funding options, or even a loan provision,” he asks. “Your employer is managing the plan from a different perspective and may be able to point you in the direction of some savings-changing resources. Your plan may also come with an advisor or investment support. If knowledge is power, your employer may have the secret tool to lower your 401(k) plan fees.”
[Read: 4 Things Millennials Should Know About Mutual Funds and Retirement.]
When it comes to 401(k) account fees, knowledge really is power. Check your plan to see exactly what fees are in play, and talk to both a financial planner and your employer to figure out the best ways to cut those fees down to size.
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5 Ways to Cut 401(k) Fees Down to Size originally appeared on usnews.com
