Retirement and Financial Independence

401k Fees Are Devouring Your Retirement Savings: Here’s How to Spot Them

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401k fees can cost tens of thousands of dollars in retirement savings over your lifetime. Hidden fees. Service fees. Registration fees. It doesn’t seem like much, but enough of them over time will consume your bottom line. Learn what the different fees are in your 401k and how to avoid them.

We accept fees as a fact of life. However, there’s one place where you can reign them in: retirement savings plans like a 401k or IRA. This is also where controlling your fees can have the most impact on your future wealth. Why?

Because fees in your retirement plans are usually a percentage of your assets, not a flat fee.

This means that the more you make, the more they make from your fees. This is good for them but not so much for you.

Types of 401k Fees

401k fees can be summed up into two broad categories: Investment and administrative. The best way to differentiate these fees is to realize that your 401k account and the investments within your 401k are two different things. The two roles are usually not held by the same organization.

Investment Fees

This covers the cost of maintaining the investments that are bought and sold in your 401k account. This includes sales commissions, marketing, and distribution costs that are incurred by the mutual fund companies (also known as 12b-1 fees).

Actively-managed mutual funds having substantial buying, selling, and decision-making to create and maintain the fund, typically charge more. These are covered under a fund’s management fees.

If you were to trade individual stocks, there are things you would have to pay for too. First, trading commissions. Then there’s the time you’d invest in researching stocks and balancing your portfolio for the right asset mix. Someone has to pay for this investment management activity.

This is why index funds in your 401k carry lower fees. If all you’re doing is buying every stock in the S&P 500, then you get to punch the clock early and go home.

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Administration Fees

Think of this as the cost of maintaining the 401k account itself. This could be for operating expenses such as record keeping or writing fee disclosure documents. That person you call when you are confused about something on your statement has to be paid.

Unlike investment fees, administrative fees may not be as visible as you’d like. Usually the company that’s providing you with the 401k account (i.e. your employer) pays these fees.

Sometimes the account managing company just takes a cut of your investments or plan assets. If you look at your statement and see a line where a tiny amount of shares was removed, that’s it.

Spotting High Fees in Your 401k

Thankfully you don’t have to track down all of these fees individually. While the administration fees may not be as transparent to the average account-holder, they tend to be less significant than the investment fees.

There’s not much you can do about the administration fees short of complaining to your HR department. And that’s usually more trouble than it’s worth.

Investment fees, on the other hand, are relatively easy to track, or at least the aggregate of them. These won’t be a line-item on your statement or even expressed as a dollar amount. You can usually find them in the plan fee disclosure documents that you get each year or in the prospectuses.

Terms to look for include expense ratio, loads, and management costs. They’re likely to be expressed as a percentage of the investment assets.

And though the percentages seem small (usually between 0.5% to 2%), due to the miracle of negative compounding interest, this can be quite significant over time depending on your investment growth.

There are also websites out there that spell out the fees associated with any given publicly traded fund or ETF. Personal Capital has a feature where you can give them access to your account and they will track down the fees you’re paying and summarize it all in one graphic. More on that later.

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How Fees Affect Your Returns

401k Fees - Burn Money

One percent of a thousand dollars is only 10 bucks. So when you’re starting out, it doesn’t seem like much. But one percent of $200,000 is $2000 and that’s in annual fees.

Not only that but if you take the effects of negative compounding interest, by the time you’re ready for retirement it will be a healthy chunk of your 401k balance. If you have enough of them and with enough time, those fees do add up.

How You Can Reduce 401k Fees

Thankfully, you have some choices to minimize the impact on your retirement funds. Investment fees vary significantly between funds. And though your 401k may not have a plethora of investment options, I’d bet that there are some relatively low-cost funds there.

If you want to do the research yourself, you can. The fees for your 401k funds are likely readily available either on your plan’s website or in other documentation. The problem is that you don’t get a sense of how reducing these fees will impact your bottom line. I’ve found a tool from Personal Capital that helped me do just that.

There may be other similar tools out there to the one I’m about to describe, but this is the one I have experience with.

Personal Capital’s Retirement Fee Analyzer

The first step after logging in is to input your account information for the investment company your 401k is in. Then it takes the current value of your account, your estimated contribution, and matching rate going forward, and assumptions about future market conditions.

Next, it applies the known fees in the funds within your accounts and produces a graph of the results.

401k fees - one percent

In deep blue are your employer and your contributions, including the current value of the account (because they are not calculating all the previous years of growth).

In lighter blue is the projected earnings of your account without fees. And in red is the effect of your funds’ fees to your earnings.

In a cruel twist of the dagger, they highlight on the graph how much as a percentage of your earnings will be lost to plan fees by the end. In the example above it’s a whopping 22%.

You can edit most of the initial assumptions based on your future outlook with the slider bars beneath the graph. Your results update immediately.

In the above example, I set the annual growth at 7% and adjusted the fees to be a 1% average over all of my accounts. The tool uses the data from your funds to give you “Your Annual Fees” (yellow, depending on severity) along with a “benchmark” (green) of what they think you should be targeting.

It also lists your account’s funds, their expense ratios, and how much annually per fund you are paying in fees.

My Experience Using Their Retirement Planner Tool

When I used this tool a few years ago, I noticed that I was paying more in fees than I cared for, so I changed my fund mix in my retirement accounts to lower my fees. The chart below reflects the results of those changes.

401k Fees - tenth percent

As you can see, I dropped my effective annual fee rate to a measly 0.11%. It then showed the percentage of earnings lost to fees was now only 3%. Not too shabby.

Reasons to Have a 401k

So what does all this mean? Should you bail on your 401k to avoid them? Absolutely not. 401k plans have so many advantages over other ways of saving for retirement that it vastly outweighs any negative effects of the fees.

Employer Match

If you get a match from your employer for your contributions, fees should be an afterthought. If you’re lucky enough to get a dollar for dollar match to your contributions, even if the fees are double that of other investments, you’re starting out with double contributions and double gains on those contributions. The effective fees you are paying are half that of an equivalent non-matching plan.

Even if your matching is at a lower rate, it cushions the blow of the effect of the fees accordingly. The potential gains on that matching contributions will likely dwarf anything lost in fees. This is why you should always participate in your employer’s 401k up to the match whenever possible.

Tax Advantages

The money you put into a 401k has tax benefits that you don’t get in a regular investment brokerage account. These tax breaks will likely eclipse any effect of fees on your account balance. Depending on the type of account, you will either have tax-free contributions or tax-free withdrawals in retirement.

All Investments Have Fees

It’s really hard to avoid fees in doing your own trading as well. Some brokerages offer a certain number of free trades per month or you can earn them through referrals. But if you’re buying mutual funds and ETFs, there will be fees associated with them.

401(k)s vs. Savings Accounts

With savings accounts paying a percent or two in interest at most and stock-based investments returning conservatively 6-7% annually, a 1-2% loss from fees is relatively a small price to pay for the increase in potential returns.

401k plans have so many advantages over other ways of saving for retirement that it vastly outweighs any negative effects of the fees.

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The Takeaway

401k fees can diminish your overall return on investment by the time you’re ready to retire. They not only sap your nest egg but the money you’re losing every year is also money that will not add to the compounding growth of your retirement fund in the years ahead.

It’s precisely the reason to use a fee analyzer tool, uncover what you’re paying, and do your best to remove those high-priced funds from your 401k.

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Nathan Kim - Contributor Nathan Kim is a contributor to Listen Money Matters. Learning from past mistakes, he spent the next twenty years educating himself on personal finance. He's logged hundreds of hours helping people improve their financial situation. Nathan has a Bachelor's Degree in Electrical Engineering and a Certificate in Economics from Georgia Tech, where he was a member of the economics honor society Omicron Delta Epsilon.
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