If you have a 401(k) chances are you're getting ripped off and you don't even know it.
With all of the associated 401(k) fees, the truth is you could be losing as much as 33% of your retirement nest egg to the financial advisors who run your plan.
Typically, these fees are completely buried in your 401(k) statement-- and even if you do manage to find out how much they are, the fees won't seem like much at first glance.
But over time, the fees can literally cost you a small fortune.
That's because not only do you lose money by paying the fees in the first place but you also lose out on the returns those fees could have generated had they stayed in your account and were reinvested.
If you haven't paid much attention to these fees, you're not alone: A recent AARP survey found 71% of respondents believed they paid no 401(k) fees.
And those who knew of the fees underestimated them by a long shot.
A study by NerdWallet found more than 90% of Americans "dramatically underestimate the total 401(k) fees the average household will pay over the course of a lifetime."
According to the study:
- 38.1% thought average 401(k) fees would cost them less than $10,000.
- 32.8% estimated between $10,000 and $50,000.
- 13.8% believed the fees would total $50,000 to $100,000.
- 7.9% thought the fees would amount to $150,000 to $200,000.
- And 4.1% put the figure at more than $200,000.
The correct response is $150,000 to $200,000 but only 3.3% of respondents picked that amount.
Where Your 401(k) Fees Go
So where do the fees go?...
Administrative fees account for 0.2% to 0.4% annually; asset-management fees, 0.5% to 1%; and fees to market funds, up to 1%. Trading fees vary based on commissions paid to securities brokers and on bid-ask spreads.
When it all is said and done, your retirement plan takes a serious beating...
"It's exactly like Wall Street taking one-third of your retirement money," Robert Hiltonsmith, a policy analyst at the New York think tank Demos, told Money Morning. "People are getting fleeced on their retirement," said Hiltonsmith, the author of a study on losses due to 401(k) fees.
Hiltonsmith's study is based a two-income household making the median income in which the couple makes contributions over 40 years.
The study assumed the couple invested equally in a mutual fund that invests primarily in stocks and one that invests primarily in bonds, gradually increasing their contributions from 5% to 8% of their salaries over the years. The stock mutual fund and the bond mutual fund each charged average market fees.
Total fees were based on the balance in the 401(k) account at any given time. The fees totaled 0.72% for bond mutual funds and 0.95% for stock mutual funds.
Over the years, that adds up quickly: If the couple had paid no fees, they would have had $509,644, but after losing $154,794 to fees, they had $354,850 at retirement.
For corporate matches, roughly the same percentage would be paid - by the company - on contributions, with the same proportion lost to fees, Hiltonsmith said.
Reducing Your 401(k) Fees
To reduce the amount you pay in 401(k) fees, pay close attention to how much of your contributions go toward administrative, management and marketing fees, as well as to trading fees. Ask your employer about possible alternative investments that may cut your fees.
Hiltonsmith urges investors to seek funds with expense ratios of less than 0.5% of total assets in the account. The expense ratio comprises administrative, management and marketing fees.
One way to reduce the fees is to invest in index funds, which include no trading fees. And research suggests the index funds like one tracking the S&P 500 generally outperform mutual funds over the long haul.
Consider that when choosing between managed funds with higher fees and index funds, says Jean Setzfand, vice president for financial security, education and outreach at AARP.
"If you have the option and the ability to choose between higher fees and lower fees," Setzfand told Money Morning, "then I think one of the easy questions to ask yourself is, 'Is it really worth it for me to stay in the higher-fee products? Are they really doing such a terrific job of beating the market over and over again to pay me enough in the long run to outweigh the downside of the fee effect?'"
If overall fees total more than 1% of the assets in your 401(k), Setzfand says, you should consult with your employer about funds with lower fees.
For more on 401(k) fees and retirement: The Scariest Facts about America's Retirement Crisis
- Money Morning:
How Millions of Americans Are Ruining Their Retirement Savings
The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s
The Online Investing Knowledge Gap: 2013 Investment Literacy Survey
The Tricky Business of Retirement: Hidden 401(K) Fees
401(k) fees and what to do about them