The law is now in effect and as a result, you probably noticed more information about your 401(k) coming to your home. Although the legal verbiage mixed with Wall Street talk may be daunting, this is mission-critical information that you have to take time to either wade through yourself or pay to have an adviser look at for you.
Sure, it looks a lot like those little folded up information sheets you get when your doctor gives you prescription drug samples but here’s a daunting fact to consider. If you were to put $10,000 per year into your 401(k) for 30 years just 0.5% less in fees would result in nearly $100,000 worth of extra money in your account! Crazy, isn’t it? A measly half of one percent is that important.
The truth is that you don’t have to read everything word for word. What you’re looking for are the numbers. First, find the annual gross expense ratio of each of your investments. This is often an easy to read number because it will say something like, “for every $1,000 invested you’re paying $2.00 in fees per year per $1,000. (that’s an expense ratio of 0.20 percent) A little bit of multiplication will tell you how much you are actually paying. If you have a $20,000 balance, you’re paying $40 in fees per year. Do this for each type of investment you have in your account.
By the way 0.20 percent is appropriate. If you’re paying more than 0.50 percent, you might be paying too much depending on the types investment options you have.
Next, check out any shareholder fees. You might be paying extra if you have a balance under $10,000, for example. There might be fees for commissions, sales loads, or other account fees. It’s not so much that you’re going to be able to negotiate these fees, but if you’re being charged for a low balance and you’re not paying the maximum that the company will match, that’s another good reason to contribute up to the max.
If there are any other fees listed, take note of them. If they are fees you can avoid—like fees for initiating a 401(k) loan or other action based fees—avoid them. Add up all of these additional fees and calculate the expense ratio for each of these account based fees. If these fees are written as a percentage of your total account balance, multiply your account balance by the expense ratio and divide by 100. (that 0.20% would look like 0.0020 on your calculator or $20 for an account with a balance of $10,000)
What can I do?
Here’s the problem. When it comes to the fees charged to you through your 401(k) plan, the only fees you have control over are the fees associated with the different investment options available to you. It’s not likely that the funds with the high fees are going to earn so much more than the lower fee options. In the investment world, you rarely get what you pay for over time so look for index funds. These come with low fees and mirror the performance of a certain segment of the market. Look for an S&P 500 index fund or one that follows a bond index.
For the other fees, if they seem high, talk to your HR people or boss about it. If they elect to stay with the same plan administrators, and they’re matching some or all of your contributions, stay with the plan since you have free money coming from your employer. If they don’t, consider a Roth IRA or another retirement plan option. If you elect to do that, find a financial advisor that can help you with your retirement planning. Remember, not having enough financial knowledge to understand all of this is not an excuse to do nothing. Ask for help when you need it.