Fees May Be Chipping Away At Your Retirement Savings
Everybody loves a bargain, but why is it that when it comes to retirement plans not many people shop around, or take the time to ask about what they will be paying in fees?
A TD Ameritrade study showed that over a third of people enrolled in a 401(k) plan thought there were no fees at all! Those people who realized they do pay fees, have no idea how to find out how much or what the fees are for.
When you do find out what you are being charged, you may think the numbers are small, but plan fees and expenses add up over time. Fees can be risky to your retirement. Here’s an example how:
Two people each have $20,000 in a 401(k) that has been invested for 20 years. The annual average rate of return is 7%. One person paid a 1.5% annual fee and the other a 0.5% fee. After 20 years, the person paying the 0.5% fee would have a balance of about $70,500. But the person paying the 1.5% fee would only have a balance of about $58,400. That’s a significant difference.
Fees for 401(k) plans fall into two general categories: administrative fees (aka “participation” fees) and investment fees.
- Administrative fees cover things like record keeping, legal services, customer support and transaction processing.
- Investment fees charged by the investment funds you choose are typically listed as “expense ratios” and are expressed as a percentage of assets. The average 401(k) costs approximately 1% of assets every year for all fees.
What does this mean for you? The average 401(k) participant will pay approximately $1,000 for every $100,000 in plan assets, but that can vary quite a bit depending on how large the 401(k) plan is. Big plans are typically cheaper and have the lowest fees.
If you are investing in a 401(k) plan, ask for a copy of the fee disclosure and examine the expense ratios on the mutual funds. In recent years, the average fees charged by actively managed mutual funds in 401(k) plans have dropped from 0.78% to 0.75%.
What are some options?
- Index funds might be an option for people looking for lower administrative fees, but there is no manager actively choosing investments for the fund on a day-to-day basis. They passively track the investments of a specific market index.
- You can pay a money-management firm to select investments. The higher fees might be worth it if the firm provides consistent performance over time.
- If you see that your 401(k) has high fees, ask your employer to look into it. Under federal law, employers have a fiduciary duty to offer reasonably priced options and to monitor the quality of the plan.
Department of Labor fiduciary rules have made it easier for investors to know what fees they are paying by requiring the disclosure of all fees and commissions. The IRS permits investors to deduct certain expenses incurred on taxable investments, such as fees for investment counsel.
CONTACT US: Learning more about the fees you are paying today can help build a bigger nest egg for tomorrow. Get educated on how to choose the right investments with reasonable fees for your retirement goals. If you need assistance with retirement planning, feel free to contact me, Theodore G. Bytnar, CFF, directly at 586.709.1947. I am a Certified Financial Fiduciary with 28 years of experience in the financial and insurance industry.
TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.