Investing in a tax-advantaged retirement account is one of the best things you can do to ensure you aren't left struggling to survive during retirement. For many Americans, one of the simplest options is to contribute to a 401(k) at work.
Unfortunately, most Americans who are investing in a 401(k) are making a big mistake: They're not keeping on top of the fees they're being charged. According to a recent TD Ameritrade survey, just 27% of Americans are aware of the fees they're paying for their 401(k).
If you don't know the fees you're paying, you could be paying far more than you should be -- and could be jeopardizing your retirement savings in the process.
Image source: Getty Images.
How much should you pay for a 401(k)?
The amount you'll pay in 401(k) fees can vary depending upon many factors, including the size of your company and the total value of assets invested.
A 2014 study conducted by Deloitte Consulting, LLP for the Investment Company Institute found the median "all-in" fee for 401(k) participants, including administrative, record-keeping, and investment fees, was 0.67%. The study also found plan participants in the 10th percentile had all-in fees of 0.29%, while participants in the 90th percentile had all-in fees of 1.29%.
However, those working for smaller companies may face higher fees. A study of 121 plans conducted by Employee Fiduciary, LLC found plans with under $2 million in assets paid average fees as high as 2.22%.
New offerings, including online 401(k) plans, could potentially reduce some costs -- although mostly for larger plans. Fees for plans with more than $1 billion in assets could average as low as 0.26% of assets, while plans for small companies could come with fees of 1.5% or more annually.
The bottom line: 401(k) fees vary substantially from company to company, so you need to know what your company's plan is costing you.
How can fees impact your retirement savings?
Understanding what fees you're paying is vital because they can have a huge impact on your ability to earn the returns you need to have a substantial nest egg.
The table below shows how fees impact your retirement account balance by the time you hit retirement age, assuming a $5,000 annual investment made between the ages of 30 and 65 that earns a 7% return.
|
Fees |
Savings at Retirement |
Amount Lost Due to Fees |
Additional Annual Contributions |
|---|---|---|---|
|
0 |
$691,184.39 |
0 |
0 |
|
0.5% |
$620,173.45 |
$71,010.94 |
$575.51 |
|
1% |
$557,173.90 |
$134,010.49 |
$1,202.59 |
|
1.5% |
$501,256.82 |
$189,927.57 |
$1,894.51 |
|
2% |
$451,601.54 |
$239,582.86 |
$2,652.59 |
|
2.5% |
$407,483.09 |
$283,701.30 |
$3,481.14 |
|
3% |
$368,261.12 |
$322,923.27 |
$4,384.43 |
|
3.5% |
$333,370.06 |
$357,814.33 |
$5,366.62 |
DATA SOURCE: AHC ADVISORS INC CALCULATOR. CHART AND CALCULATIONS BY AUTHOR.
Unless you want to come up with a few thousand extra every year to make up for high fees, you need to pay attention to what you're paying.
What should you do?
If you aren't sure what your 401(k) fees are, find out. Start by talking to human resources or your 401(k) plan administrator. If you can access your 401(k) plan online, there should be information about fees on the website.
If you discover your fees are too high, your best option may be to invest as much as necessary to get the employer match, if your employer provides one. Then max out an IRA before contributing any more to your 401(k).
You're allowed to invest as much as $5,500 in an IRA in 2018, and can make an additional catch-up contribution of $1,000 if you're over 50.
When you invest in an IRA, you may also have a wider selection of investments than in a 401(k) and can choose affordable exchange-traded funds (ETFs) to invest in. If you don't want to manage the money yourself, robo-advisers such as Wealthfront and Betterment can handle your investments for you. Both manage accounts under $10,000 for free and charge a 0.25% fee for balances over $10,000.
Just like with a 401(k), you can contribute money automatically to your IRA each paycheck, whether you open an IRA at a traditional brokerage firm or with a robo-adviser. However, you'll need to set up these contributions through your bank or the company you're investing with. If you decide to go this route, make sure to automate the process so you don't shortchange your retirement savings.
Make sure you understand your fees
When you review your 401(k) fees, you may decide the fees are reasonable, especially given the convenience of having contributions taken right out of your paycheck.
Just be sure to actually understand what you're being charged and keep tabs on how fees are affecting your account balance so you can make the most of your retirement contributions.
