Check out this scenario laid out by the U.S. Employee Benefits Security Administration: For someone with 35 years until retirement and a 401(k) plan valued at $25,000, fees can make a big difference. If the investments in such an account return 7% annually and fees are 0.5% of all plan assets, that 401(k) plan will grow to $227,000 by the time the recipient hits retirement age—even if the recipient doesn’t drop a single additional dime into the plan.
But what if the 401(k) plan fees were 1.5% instead of 0.5%? Then the retirement landscape isn’t so bright. Instead of $227,000, the plan participant would only earn $163,000. In other words, fees alone would cut an additional 28% of the 401(k)’s account balance by retirement.
These steps can help minimize the negative effect of fees on your plan performance:
Talk to your employee benefit representatives—Your human resources department or employee benefits representative can answer many questions regarding how fees affect your plan. Ask how much you’re paying in fees and, if those fees seem high (usually 1.5% of your plan assets or higher), ask if there are better plans available with more competitive fees.
Ease fees on your own—Avoid heavy service fees by avoiding fee-triggering behaviors linked to your 401(k) plan. Taking loans is a no-no for many reasons. Among those negatives are handling fees for processing your hardship loan.
Load up on no-load funds—Check your 401(k) plan package, or ask your benefits rep, to see what investment choices are in your 401(k) plan. Chances are you have a few no-load mutual fund options available. No-load funds significantly decrease the investment fee portion of your plan’s fee structure.
Turn to index funds—Like no-load mutual funds, index mutual funds offer much lower investment and administrative fees than traditional mutual funds. Most mutual funds are “actively managed”—meaning some fund company manager is making hands-on decisions every day regarding your fund. Index funds are “passively managed”—meaning they are created to mirror a key financial index like the Russell 2000 or the Dow Jones Industrial Average Index. Whatever the Russell index or the Dow Jones does, that’s pretty much how your index fund will do. Consequently, index funds are simpler and much more fee-friendly.
Get involved–If you’re feeling ambitious, write your elected representatives in Washington and tell them you want Wall Street to start clearly noting all of its 401(k) plan management fees. Remember, when it comes to 401(k) fees, a little education—and a little perseverance—goes a long way.
The U.S. Employee Benefits Security Administration (www.dol.gov/ebsa) offers a great resource for learning more about 401(k) fees, including a helpful 401(k) fee checklist.
And, for all your retirement needs, the people at Priority First are here to help. Stop by or call us today at Priority First FCU.