Many of us think that since we have been stashing funds into 401(k)s religiously, all will be good come retirement day. However, this may not be the case if your 401(k) is loaded with fees that you might not even know of.
The silent stalker on retirement account bottom lines are high fees. Many investors are too busy to take notice of the fine print when quarterly statements are mailed, but fees are increasingly biting a bigger chunk of retirement account balances, which can add up to a loss far greater than one would imagine over the long run.
A recent study from the Center for American Progress finds that typical 401(k) fees, which in total add up to about 1 percent per year, can potentially reduce the average worker’s retirement fund by nearly $70,000 over 40 years. Making up for that loss would require three extra years of work before retiring.
"The corrosive effect of high fees in many of these retirement accounts forces many Americans to work years longer than necessary or than planned," the report, being released Friday, concludes.
Many who save for retirement, and post about it on their retirement blog, are unaware of the fees they pay when they put money away. They are also unaware of alternatives to company-sponsored programs, as the information offered is usually hard to decipher and often confusing. This becomes a detriment to the everyday investor, who needs to save for retirement.
Higher fees are usually charged by companies offering funds that are more aggressive, trying to beat market indexes with frequent buying and selling of securities. Index funds usually charge lower fees, as they follow steadier benchmarks, such as the Standard & Poor’s 500, which typically requires less management, and hence, lower costs.
Average fees can also vary based on the size of the employer’s 401(k) plan. Total management costs are usually a bit higher with smaller plans than with larger ones. A typical plan for a company holding more than $1 billion in assets may have costs of approximately 0.35 percent a year in contrast to 1 percent that would be charged to a plan with less than $50 million in assets.
The Labor Department announced plans last month to update a 2012 rule so companies will be required to disclose fees that are charged on 401(k) plans.
People will then be able to make smarter choices and avoid plans with heavier fees, keeping more of the money they’ve worked so hard to save.
