Your 401(k) and its fees
Assets in 401(k) type accounts have ballooned to around $6.7 trillion, making up close to one-fifth of the nation’s total retirement savings. Despite their popularity, many investors don’t understand how their plans work. Would it surprise you to learn that almost all 401(k) investors pay fees associated with their account?
The average all-in cost of those fees is 0.45% and range depending on the type of plan and the cost of funds offered — depending on the plan they can range from around 0.37% to north of 1.4% per year! Those costs range from plan administration fees and individual service fees to expense ratios – the indirect cost of certain investments, such as mutual funds and ETFs.
Some Practical Tips
If you want to reduce your fees, here are some practical tips.
First, find out what you’re paying. A surprisingly high number of investors don’t know what their investment options and related costs are. You can find some of this information online but you may have to ask some questions internally with your employer’s HR department or make some calls to your plan administrator. It will be worth your time.
Analyze your holdings. Certain investments, particularly those that are more actively managed, will have a higher fee than others. Consider passive low-cost index funds if your plan offers them, or diversified target date or target retirement funds that are well-suited for those hands-off investor types.
Consider rolling it over. By rolling over your entire account to a Traditional IRA or Roth IRA that allows active control of your account you’ll have a broader set of investment options and won’t pay plan administration or individual service fees. It is worth noting two important facts: one is that you cannot perform a roll over while you currently work at the company. The second is that you will not have to pay any taxes on a 401(k)-to-IRA rollover unless you convert your assets from a Traditional 401(k)/IRA, which have the same tax status, to a Roth IRA. For more information on whether a Roth conversion makes sense, you can reference my colleague Mark Haser’s article on when to consider a Roth conversion.