CBG Blog

​How Much Are You Paying for Your 401(k)? 

Hidden charges can rob you of a comfortable retirement. Do you know how much you are paying?? Review these three strategies with your financial professional and see if rolling your 401k into a less expensive retirement vehicle like a Fixed Index Annuity is a better option…

1. Add fund expenses charged to your 401(k) These charges, which go to the companies that manage your plan investments, are typically the largest 401(k) fees you pay. To estimate your direct investment expenses, look for the expense ratio for each fund you own. That figure may be listed on your 401(k) plan web-site. Expense ratios are expressed as an annual percentage of your total investments. Next, grab your most recent 401(k) statement and record the expense ratio next to the balance in each fund you own. Multiply the expense ratio by your ending balance to determine the cost of each fund. For example, if you have $10,000 in a fund with an expense ratio of 0.55%, you are paying $55 a year. Add up the expenses for all of your funds. A total expense ratio of 1% or less is reasonable. If your 401(k) plan uses a broker or investment consultant, as many smaller plans do, you may be charged an additional 2% or more in portfolio-management fees.
2. Determine if plan operating expenses are passed on to your 401(k) You may also be paying your share of what it costs your employer to operate the 401(k) plan. Bigger companies often pick up plan expenses on behalf of their employees, but smaller employers can't always afford to do that. Get a copy of your plan's summary annual report from your benefits office. Under the section labeled "basic financial statement," look for total plan expenses and subtract the amount of benefits paid. The difference is the plan's net administrative expenses. Next compute your cost for administrative expenses, divide the net expenses (for instance, $12,000) by the total value of the plan (let's say $1.5 million). Multiply that percentage -- which is 0.8% (.008) in this example -- by your total account balance. That will give you your share of total plan expenses that are deducted from your account before your individual balance is calculated.
3. Investigate undisclosed or hidden costs You could be funding your boss's retirement or that of a colleague in the next cubicle without realizing it. That's what happens when your plan's service provider and individual mutual fund companies engage in "revenue sharing" arrangements. Such agreements are seldom disclosed; even your employer is unlikely to be aware of them. For example, some high-cost funds may offer a rebate to the service provider to defray overall operating expenses. So, the excess fees that you pay for your fund are used to pay the costs for everyone else in the plan. Or your plan's provider may receive commissions from mutual fund companies to steer participants into higher-cost funds How do 401(k) fees affect your bottom line? With nearly 50 million U.S. workers depending on their 401(k) plans for future income, investment fees and related retirement-plan expenses are getting a lot of attention. In a report on 401(k) fees, the Government Accountability Office (GAO) concluded that such charges could "significantly decrease retirement savings." Even a one-percentage-point difference in fees can have a big impact. For example, let's assume that a 35-year-old worker leaves $20,000 in his 401(k) plan when he switches jobs and never adds to that account. If the account earned 7% a year, minus 0.5% in fees, his balance would grow to about $132,000 at retirement. But if the fees were 1.5% annually, the average net return would be reduced to 5.5%, and the $20,000 would grow to about $100,000. Over 30 years, the additional charges whittle the account balance by nearly 25%. Despite the potentially devastating impact of excessive fees, the U.S. Department of Labor receives a small number of complaints, indicating that few plan participants are concerned about or even aware of the problem. The GAO report recommended that Congress require 401(k) plan sponsors to disclose fee information on each investment option to plan participants. (Legislation has been introduced in both the House and Senate.) The GAO also urged the Labor Department to require plan providers to disclose more information to employers, including revenue-sharing arrangements that may result in higher costs to 401(k) participants. Although the Labor Department has issued proposed regulations to improve fee disclosures, they apply only to the employers who sponsor retirement plans and not to employees, who often bear the brunt of the overhead. The department is expected to issue another proposal soon detailing which 401(k) fees should be disclosed to plan participants. If your 401(k) fees are too high . . . If you think your plan fees are out of line, you should contact your boss in a nonconfrontational way, show how much you are paying in 401(k) expenses and ask if your plan could offer some lower-cost alternatives. Then spread the word to your colleagues.