Do your research on 401(k) fees, commissions
Websites that can help you determine what you are paying in commissions, administration fees, investment fees and service fees.
The Philadelphia Inquirer
Commissions, administration fees, investment fees, service fees. Your company 401(k) retirement plan may be subject to any and all of these — some of them year-in and year-out.
Fees on 401(k) plans are the subject of this post at the U.S. Department of Labor page. It illustrates the problem investors face, like this:
Say you have $25,000 in a 401(k), with 35 years to go before you’ll need to tap the account for income. If the investment return is 7 percent per year, and fees are 0.5 percent, “your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000.” That’s a 28 percent reduction in the balance.
The page has a checklist for finding and evaluating your financial institution’s fees.
• Expense ratio: A 401(k) fund expense ratio of 1 percent or more is one red flag of a “dud 401(k)” says this article at ConsumerReports.org.
How do you know what your plan is charging? The article says that, under rules of the Department of Labor’s Employee Benefits Security Administration, which oversees private retirement plans, “401(k) plan sponsors are required to send participants annual disclosures outlining fund fees and their effects on savings over time.” Those disclosures are due to you by Aug. 30 each year.
Armed with the disclosures, employees may be able to lobby employers to drop the duds for better plans. And if the company won’t budge: “Invest the minimum needed for the full company match (often 6 percent of your gross income, for a 3 percent match). Put other savings in a Roth or a traditional IRA composed of low-cost funds.”
• Do the math: Also, with your disclosure numbers, you can use this calculator at 401kfee.com to see how much the fees will set you back over your account’s lifetime.
Jerry Schlichter is a lawyer who has litigated against high 401(k) fees and is hoping the U.S. Supreme Court will hear a case involving them. This recent Reuters article describes Schlichter’s efforts as the “401(k) hunter.”
A post, “High Fees in Your 401(k)? They Might Be Even Worse in Your IRA,” at Nasdaq.com warns that the vagaries of 401(k) fees are shared with IRAs, where even iterations of the same fund may come with different fee structures. So, you don’t necessarily get a break on fees by rolling over a 401(k) into an IRA when you change jobs or retire.
• For employers: The Labor Department has this page on how to set up a 401(k) plan for your workers. It’s no easy task. Among other things, a business must choose among traditional plans, safe harbor plans and automatic enrollment plans.