Be aware of the fees you pay on the funds in your retirement savings. High fees on your retirement accounts will eat away at your savings.
The funds that you invest in through your 401(k) have costs associated with running them. Your employer pays for some of the costs; other costs are passed along to you, the investor, through fees that are deducted from your 401(k) account.
The impact of fees
Over time, high fees will eat away at the value of your account, leaving you with less money in your retirement years. To understand how this affects you the individual investor consider the following example:
There are two main problems when it comes to fees:
The information on fees is obscure and hard to understand
The fees are often too high.
There are two main types of fees associated with 401(k)s:
Plan administration fees. These are the expenses involved in the day-to-day operation of running a 401(k) plan, including recordkeeping, accounting, online access and customer service. The administrative fees may be charged by the financial company that manages your plan investments (the “plan provider”) or by an outside company hired by your employer to handle administration of the plan.
Investment fees. These are the fees charged by mutual fund companies to pay for the costs of managing 401(k) plan investments. These are the largest fees you pay and are charged annually as a percentage of your account balance. A typical percentage is 1%. So for every dollar you have in a mutual fund, the mutual fund company will take 1 penny every year to cover its costs. This is called an “expense ratio.” The expense ratio is different for each mutual fund depending on how much money it takes to run it. Mutual fund expense ratios can be found in the fund’s prospectus.
In addition, you may pay individual fees for optional services such as hardship withdrawals and loans from your 401(k) account.
How do you know what fees you are paying? New regulations require employers (plan sponsors) to disclose all 401(k) fees and costs to their employees (plan participants). Your 401(k) quarterly statements should clearly show the dollar amount of fees deducted from your account. If you are unsure about the fees you are paying, ask your company’s plan provider to provide you with details about the fees for your particular 401(k) plan. Ask questions if you feel your fees are too high compared with other funds, and lobby your employer to make changes. *
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* All figures in 2012 dollars. Workers are assumed to begin saving at age 25 and retire at age 67. Example reflects median salary of $30,502 when worker starts saving at age 25. Designed by NARPP, content provided by CAP. © 2014 NARPP