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Are 401(k) Fees Shrinking Your Retirement Returns? Here's What You Need To Know

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A telling survey unearthed just how little people know about the fees they pay for their 401(k) plans. The analysis, conducted by TD Ameritrade, found 37 percent do not believe they pay any fees, 22 percent did not even know about fees and 14 percent did not understand how to determine fees.

Ironically enough, the survey found a whopping 96 percent know exactly how much they pay for entertainment services such as Netflix, Spotify and Hulu. As a comparison, a mere 27 percent know their 401(k) fees.

A 401(k) plan is not free. In fact, 95 percent of people participating in a plan pay administrative fees, fund fees and other miscellaneous charges. It is important for investors to understand how these charges add up so they can make better financial decisions for their futures.

High fees put a dent in retirement

The 401(k) fees charged to investors can significantly impact a portfolio's value over time. For instance, paying just one percent in fees over a span of 40 years can cost an investor $590,000!

While many investors may not be aware of fees, the truth is that they are not exactly hidden. As a part of their fiduciary duties, employers are required to provide plan participants with disclosure information and fee documentation. It is an arduous and time-consuming reading for participants. Many people ignore the fine print, but they should not because it is worth the time and effort. To help better understand terms, participants can also:

  • Ask employers if a streamlined benefits booklet is available.
  • Review your 404a-5 Participant Fee disclosure document. You can always ask your benefits director for a copy.
  • Determine or ask your HR representative if the plan has “revenue sharing” (12(b)1 fees and Sub T/A fees).
  • Revenue sharing is used to pay the service provider vendors (Broker and record-keeper).
  • Talk to an investment advisor attached to the retirement plan.
  • Examine year-end statements that arrive in the mail.

A typical fee of one or two percent does not sound like a lot, but this adds up to a bundle by the time retirement rolls around.

Understanding 401(k) fees to work towards building a better future

Today, 401(k)s are a significant part of retirement planning and a significant source of income for seniors. Investors who educate themselves on the fees can pursue building a better financial future. Several free tools are available online to help navigate the often tricky 401(k) waters. These tools offer:

  • A quick insight into 401(k), 403(b) or other defined contribution plans.
  • A breakdown of administration and individual fees.
  • Understanding 12(b)1 and Sub T/A fees.
  • A view of specific investment holdings and plan fees.
  • A comparison and contrast of plans and their fees.

These are all important factors to track, especially when a decision has to be made about existing 401(k) investments.

Deciding what to do with 401(k)s

Years ago, many people worked the majority of their careers for the same employer, collecting a pension and Social Security at retirement. That is typically no longer the case. The future of Social Security is perpetually uncertain and employer-provided pensions are all but extinct. Additionally, trends indicate people stay with their jobs, on average, just a little over four years. Job hoppers will need to decide what to do with potentially several 401(k) plans.

  • About 22 percent of 401(k) owners leave their accounts with their original employer. However, it is a good idea to compare fees to see which employer has less expensive 401(k) fees and contrast these with IRA fees. An additional consideration is the quality of the fund lineups as well as the need for investment and strategy flexibility.
  • Approximately 13 percent of people cash out their 401(k). Withdrawing before retirement age is seldom a good idea, as it typically comes with steep pecuniary penalties that sabotage financial futures. Investors also lose the valuable tax advantages that accompany investing in a 401(k).
  • Rolling over accounts to either an IRA or a new 401(k) (almost 65 percent of people do this).

It is a common misconception, but many people believe 401(k) funds have cheaper pricing than individual investments. This is not always true. Similar options or options with more selections, and similar or lower fees can be found. Individual IRA’s provide for more options and strategies and you can have a financial advisor for consultations.

Another possibility is to consolidate multiple 401(k) assets into one IRA plan. IRAs may come with similar fees and offer a broader assortment of investments, tools and other resources. Not to mention, it is far easier to keep track of one account instead of juggling multiple 401(k)s.

It may seem that retirement is far off, but it is important to know the fees associated with your 401(k), because they can potentially reduce future income by tens of thousands of dollars. Understanding and limiting these fees to a minimum will help you enjoy a healthier, financially secure future.

Brian Menickella is a co-founder and managing partner of The Beacon Group of Companies, a broad-based financial services firm based in King of Prussia, Pa.

Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

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