The United States is facing a retirement crisis, with approximately 56 million private sector workers lacking any form of retirement savings plan. Failing to have a plan in place can lead to insufficient funds for a comfortable retirement.
That’s why having a 401(k) plan if offered by your employer, is crucial. However, knowing the fine print that comes with even the most generous 401(k) plans is important. Here are seven common fees associated with 401(k) accounts that could erode your hard-earned savings, along with suggestions on potentially minimizing them.
1. Administrative Fees
Maintaining a 401(k) plan involves various administrative services, such as record-keeping, legal services, and customer support. These costs can be covered by the employer or passed on to the employees.
Administrative fees often take the form of a flat fee, which can disproportionately impact small investors. For instance, a $25 flat fee on a $2,500 investment translates to a 1% fee, a significant deduction for a small balance. While it can be challenging to avoid administrative fees, you can reassess the need for additional services and eliminate them if necessary to reduce your account’s administrative fees.
2. Investment Management Fees
Mutual funds within your 401(k) charge fees for managing and operating the funds, known as investment management fees. Surprisingly, these fees can be one of the largest expenses in your 401(k) and throughout your lifetime. Over a 40-year investment horizon, assuming a 7% market return and 3% inflation, a 1% fee can consume approximately a quarter of your potential returns. Investment management fees are mandatory for all retirement accounts except for self-directed IRAs controlled by the account owner. These fees can easily add up to tens of thousands of dollars.
3. Individual Service Fees
Individual service fees may arise for specific services, such as account division in a divorce or making inquiries. Although these fees are often one-time charges, they can be inevitable if you require these services.
4. Sales Load Fees
Sales load fees are incurred when buying or selling certain mutual funds within your 401(k) plan. Consider funds that offer no-load or low-load options to avoid or minimize these fees. Such funds typically don’t charge sales loads, allowing you to invest more. Additionally, some mutual funds or investment providers engage in revenue sharing, where they share a portion of their fees with the plan provider. While these fees may not be directly charged to you, they can indirectly impact your savings.
Understanding the details of any revenue-sharing arrangements can help you make informed investment decisions.
5. Termination Distribution Fees
If your employer terminates your 401(k) plan, fees might be associated with distributing the assets. Ensure you understand the potential fees for ending your account and consider other options, like transferring your funds to an IRA or a different employer’s plan.
6. Advisory Fees
You will be charged advisory fees if you hire a financial advisor to manage your retirement accounts. These fees can be costly. To mitigate this expense, you can reduce the areas where advisory services are rendered. If you already pay investment fees, you can eliminate this cost as the services are similar.
7. Inactivity Fees
Lastly, be aware of potential inactivity fees linked to your 401(k) plan. Some plans may charge fees if your account remains inactive or falls below a minimum balance threshold. Stay informed about any inactivity fees and take the necessary steps to avoid them.
How to Avoid or Minimize Fees in General
While some fees associated with 401(k) plans cannot be eliminated, there are ways to minimize their impact on your retirement savings. Review your plan’s fee disclosure documents and statements to understand the fees you currently pay. Compare the fees charged by your plan with other available options, such as IRAs or other employer-sponsored plans.
Discuss the possibility of lower fees with your employer or plan administrator. Diversify your investments by choosing low-cost index funds or passively managed funds with low expense ratios. Regularly monitor your account and consider rebalancing your investments if needed. Continuously educate yourself about retirement planning and investment options to empower yourself in making informed decisions.