Hidden 401(k) fees can be the bane of a retirement saver's life. They add up, and can eat into portfolio gains.
How bad is the problem of onerous 401(k) plan fees? According to the Federal Reserve's updated Survey of Consumer Finances, in spite of the long-running bull market and an improving economy, the typical couple nearing retirement will only receive $600 per month from their 401(k) plans and individual retirement accounts combined.
"That $600 a month is not indexed for inflation, so its purchasing power will decline over time," says Pamela Yellen, a financial investigator and New York Times bestselling author. "That $600 a month is also likely to be the only source of income people will have to supplement Social Security because the typical household has virtually no other savings outside of its 401(k) and IRAs."
Fees can take a big bite out of 401(k) plan earnings, Yellen says. "The reasons cited for poor 401(k) plan performance include persistently high fees, along with "leakages" that occur from cash-outs at the time of a job change.
Those fees and leakages can add up to over $41,000 in 401(k) fees over the life of your retirement savings plan, states Blooom, a 401(k) robo advisor.
Key 401(k) Plan Fee Savings Steps
What steps can you take to minimize 401(k) fees? Here are some good ideas:
Get educated -- Investors can use FINRA's Fund Analyzer or Morningstar.com to check their fund expenses and historical performance, says Andrew Wang, a financial planner at Runnymede Capital Management, in Mendham, N.H.
Avoid 12B-1 Fees -- The 12B-1 fee, an annual marketing or distribution fee on a mutual fund, can cost as much as 1% of the 401(k) account's net assets, and should be avoided. "The trend today at many companies is to offer Institutional Class, R5, or R6 (lower fee) fund shares that do not have embedded 12B-1 fees," says Wang. "Therefore, these funds carry the lowest annual expenses." Ask your employee benefits liaison about 12B-1 fees, he advises.
Aim low on expense ratios -- "Every case can be different, but generally speaking, a fund in a 401(k) should have an "expense ratio" under 0.50%, maybe even closer to or less than 0.25%," says John C. Brandy, a financial consultant at Open Mind Generations, in Redmond, Wash. Anything more than 0.50% is a potential red flag, as it points to a more expensive 401(k) plan fund.
Keep an eye on old 410k plans -- Do your homework whenever you leave your job or change jobs, and consider moving your 401(k) plan. "Most people leave their 401(k)'s behind, which can be a big mistake," says Sabrina Glaser, an employee benefits attorney at Ropes & Gray LLP. Try to find lower-cost investment options outside of your former employer's plan, Glaser explains.
"You possibly can roll your 401(k) over to an IRA and invest in index funds, which may bear lower fees than the actively managed options in your former employer's plan," she notes. "Also, some employers charge ex-employees an administrative fee for the privilege of staying in the company's 401(k) plan, so it may make sense for you to roll your 401(k) balance into an individual retirement account or a new employer's plan if you're being assessed such a fee."
Check for in-house options -- One increasingly popular 401(k) fee-saving is to utilize an "In-Service Withdrawal" feature, says Todd Burkhalter, CEO and a financial consultant at Drive Planning, near Atlanta, Ga. "This feature is not always available for 401(k) plan participants, but when it is, you can really save money," he explains.
"Some plans allow you to withdraw 20% per year to roll into a self-directed or rollover IRA. This would allow you to choose exchange-traded funds or stock portfolios that don't carry some of the intrinsic costs and fees within a 401(k) plan." This feature isn't typically advertised, so Burkhalter recommends consulting with your human resources or benefits manager on any plan withdrawal options.
Fight Back Against High 401(k) Fees
There's no good reason why you should be held captive by onerous 401(k) plan fees. Follow the steps above and see if you don't cut thousands of dollars in 401(k) plan fees over the course of your retirement savings campaign.