There's no cookie-cutter number regarding how much someone should have saved for retirement, but one thing is for certain: It's better to have too much saved than not enough. One of the best tools for saving for retirement is a 401(k) plan, and while many people have them, most don't know how much they're actually paying for them. Here's a move that could save you thousands.

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It can be expensive to be hands-off

There are many things to love about 401(k) plans, but one of the drawbacks is the limited investing selection. Your 401(k) plan provider will give you options to choose from, and it usually includes your company's stock (if it's a public company), market cap-based index funds, and target-date funds. Target-date funds are exchange-traded funds (ETFs) based on your projected retirement year, and as you get closer to the target date, the fund automatically rebalances itself to become more conservative.

The hands-off approach you can take with target-date funds may seem ideal, but it comes with a sturdy price tag since they must be actively managed. It's possible to find a target-date fund with an expense ratio in the 0.50% range, which may seem small on paper, but it adds up to a lot over time. For perspective, the Vanguard S&P 500 ETF (VOO 0.15%) only has a 0.03% expense ratio.

You might not find options that cheap in your plan, but even some savings can add up. Let's compare the difference in value between a 0.50% expense ratio and a 0.25% expense ratio on an account if you were to contribute $500 monthly for 25 years, averaging 8% annual returns.

MONTHLY CONTRIBUTION EXPENSE RATIO ACCOUNT TOTAL AMOUNT PAID IN FEES
$500 0.50% $407,867 $30,768
$500 0.25% $422,939 $15,696

Data source: author calculations

Even a slight 0.25 percentage point difference in expense ratios saved over $15,000 in fees over 25 years. If the average annual returns were higher, the amount saved would be even higher.

Take out the intermediary

Regarding stocks, target-date funds are "funds of funds," meaning they're funds that consist of other funds (which is part of the higher costs since the funds they hold also have fees). Instead of going through target-date funds, you can invest in the type of funds they hold yourself. You need four types of index funds for a well-rounded retirement stock portfolio: large-cap, mid-cap, small-cap, and international. Those four cover a lot of ground.

How much you should allocate to each mostly depends on your age and risk tolerance, but here are baselines you can use and adjust accordingly: 

Younger than 40

Someone younger than 40 can afford to take on more risk because they have more time to bounce back from bad investments or down periods in the stock market. In this age range, a portfolio could be all stocks broken down as follows:

  • Large-cap: 50%
  • Mid-cap: 15%
  • Small-cap: 15%
  • International: 20%

Age 40 to early 50s

You don't have to become too conservative in this age range. You may not have all your portfolio in stocks, but the majority of it should be. One solution could be an 80%/20% split between bonds and stocks, with breakdowns looking like this:

  • Bonds: 20%
  • Large-cap stocks: 48%
  • Mid-cap stocks: 8%
  • Small-cap stocks: 8%
  • International stocks: 16%

Age 50 into retirement

This is the age range where you want to begin to prioritize preserving the money you've made. You don't want to abandon stocks altogether, but you should up your stake in bonds and cash. Here's a potential breakdown:

  • Bonds: 30%
  • Large-cap stocks: 35%
  • Mid-cap stocks: 2.5%
  • Small-cap stocks: 2.5%
  • International stocks: 10%
  • Cash: 20%

There's no one-size-fits-all approach

It's important to remember no single approach works for everyone. You may decide you're perfectly comfortable with target date funds' higher fees instead of having to worry about reallocating your portfolio yourself. There's absolutely nothing wrong with that. Target date funds exist and are becoming more popular for a reason: They get the job done for many people.

Before deciding that reallocating your portfolio yourself isn't for you, understand how relatively simple it is to do. All you have to do is log onto your plan provider's platform (like Fidelity or Vanguard, for example) and adjust the percentages of your investment elections. With a little bit of time every few years, you could accomplish a lot of what a target-date fund accomplishes and possibly save yourself thousands along the way.