Everyone knows they should be saving for retirement. Some are closer to their goals than others, and some may even know the difference between an IRA and a 401K, but few people know how much they are paying in fees just to have a retirement account. The fees may seem like an insignificant amount, usually ranging from 0.5% to 2%, but they can actually cause major changes in your final retirement total over a period of time. When you crunch the numbers, you may discover you’re losing out on tens of thousands, if not hundreds of thousands, of dollars by the time you want to retire. In some cases, this may cause you to work several years longer than you planned just to make up the difference. Below are a few common fees you could be paying with your 401K account and what each means.
- Investment fees. These fees contribute to the management of the investment. With a mutual fund, the broker needs payment for services, and the fees may even be used to cover marketing and distribution costs. Mutual funds can also include a front end load or back end load that is basically a commission to the broker for the purchase or sale of shares.
Instead of a one-time fee on the front end or back end of your investment, there is another avenue for collecting commission, and it’s through a 12b-1 fee. This fee takes a percentage of the plan’s assets annually, typically ranging from 0.25% to 1%.
- Administrative fees. These fees pay for mailed statements, website upkeep, and even education materials for the customer including financial advisors. Some employers will pay this fee, but sometimes the cost is spread out amongst the plan holders. Those with the most shares will pay a bit more than those with few shares. Some businesses are so small that fund companies see little value in offering them retirement plan options because the cost of managing the plan wouldn’t be worth the little returns. There are middle men, however, who bundle small companies together and present them as one group to the fund companies. In this case, you may also be paying for that “wrap fee” of bundling those plans together.
- Individual service fees. As the name implies, these fees are based on the activity of your personal plan. You may need to take a loan, or hardship withdrawal, from your plan during difficult financial times, or you may want to make a full withdrawal after leaving employment. These cases will often result in a flat fee depending on your specific plan. There may also be quarterly fees and a set-up fee associated with your individual plan that you should always ask about before signing up.
- Self-Directed brokerage fees. Sometimes companies will allow an employee to choose a plan outside of the ones they are offering, but you may face a self-directed brokerage fee in that case. Sometimes these fees can be higher than the fees associated with in-plan options, so research them before considering this option if it’s available to you.
While some fees are unavoidable, there are low fee plans out there to be aware of. While there are several factors to consider when choosing a 401K plan, fees shouldn’t be an overlooked one, especially if they will cost you big time in the end.