When’s the last time you checked how much you’re getting charged on your 401k?
If you don’t know how much your 401k fees are, you are not alone. 50% of Americans are unaware of how much they’re paying, and many people think that they don’t have any fees at all.
But 401k fees do exist, and their rates can vary greatly.
In fact, the cost to maintain your 401k could even mitigate any tax benefits you might receive. This is certainly not the case for everyone, but the only way to know whether you are paying too much in 401k fees is to find out how much you’re actually paying.
Determine How Much You’re Paying for Your 401k
With 401k fees, small percentages and minor expenses add up over time. To make sure you’re saving enough to retire with the lifestyle you desire, you first need to know how much you’re paying.
1. Check your plan’s prospectus.
Your 401k provider should have a prospectus available that describes the plan in detail. In this document you’ll find all sorts of useful information, such as what expenses are associated with different types of investments and the performance history of various investments.
However, a prospectus can be daunting if you are not used to reading through investment literature. Sometimes a prospectus can be very long, contain a lot of technical language, and make it very hard to find the information you need. A financial planner, like our experts at BP Financial, can help you make sense of this document.
2. Look through your company’s benefits booklet.
Most companies hand out a booklet to all employees when hired, explaining the available benefits. If you don’t remember where you put yours or if you even received one, ask Human Resources for another copy.
The language in the booklet should be a lot more user-friendly than the prospectus. Plus, you can always ask HR to clarify something specific to your company’s offerings.
3. Review your year-end statement.
When you get year-end statement in the mail from your 401k provider, you might be tempted to just recycle it, shred it, or toss it in the trash.
However, there is a great wealth of information in this statement! Keep them filed each year so you can compare fees from one year to the next. That way, you can track how they are changing over time.
Small Differences in Fees Makes A Big Impact
While ignorance may be bliss, it can cost you a pretty penny in retirement.
Even a small difference in fees, such as 0.25% or 0.5%, can make a huge difference on how much money you have for retirement.
For example, say you have a 401k with a 6% return. After an initial investment of $10,000, you contribute $10,000 a year over 30 years.
If your 401k charges you 0.5%, you’ll lose $75,922 in fees, or 9.1% of your total fund.
However, if your 401k charges you 1.5%, you’ll end up losing a staggering $205,605 in fees, or 24.5% of your total fund.
That minor 1% difference ends up costing you nearly $130,000 over time – enough to buy two pretty nice boats for your retirement!
Types of Fees
In order to determine how much you’re really paying in fees, you need to consider all three types.
Though your administration fees will likely remain stable, your individual service and investment fees fluctuate based on your actions, potentially causing major variances in your fees from year to year. (That’s why it’s so important to keep those year-end statements!)
You could be charged for:
Plan administration fees. These are the fees you pay for your investment company to run its business. They might include paying for operational costs such as accounting, record keeping, legal, and trustee services.
Individual service fees. These fees have to do with additional services or features that you might use, such as withdrawing a loan from your 401k.
Investment fees. Many people find the most variance in these fees, so take a close look at them. Investment fees pay for the active management of the particular investments you have chosen for your 401k.
How Can I Lower My 401k Fees?
Lowering your 401k fees isn’t an easy process, but there are steps you can take.
First, if you currently work for a small company and are planning a job change soon, consider moving to a larger company. Since the cost can be absorbed by the high number of employees, larger companies often have lower 401k fees.
If you don’t plan on switching companies anytime soon, you can talk to your current employer about any leeway they might have in what their plan offers. For example, some people choose to move away from actively managed funds, and instead opt for passively managed funds, such as index funds and ETFs.
Finally, you can talk to a financial planner about getting the most out of your 401k. Contact the financial experts at BP Financial today to find out if you are paying too much for you 401k.