Got a 401K?
Is contributing to your 401(k) one of the ways you are investing in your financial freedom? Great! Now, lets help your 401(k) balance grow faster.
A 401(k) plan is a good way to make tax-deductible contributions towards retirement. However, there may be ways to save yourself thousands of dollars just by knowing what 401(k) providers don’t want to disclose.
The 411 on your 401(k)
A 401(k) is a retirement savings plan sponsored by an employer. It lets employees save and invest a piece of their paycheck before taxes are taken out.
Taxes aren't paid until the money is withdrawn from the account. Only an employer is allowed to sponsor a 401(k) for their employees.
The terms of each employer's 401(k) plan varies. Your contributions to your retirement savings may be matched by employer contributions in a number of ways.
Sometimes, employers match a percentage of employee contributions, up to a certain portion of total salary. Many financial experts recommend contributing up the the employer’s match. At the very least, it’s “free money”.
These are great benefits disclosed up front. But what’s not so apparent? The hidden and excessive costs that can add up.
Seemingly “tiny” fees.
For decades, 401(k) providers didn’t want customers to know about a number of fees and costs. Until 2012, companies providing 401(k) plans were not required by law to disclose how much they were charging their customers.
These fees are sometimes referred to as investment expenses, communication expenses, administrative expenses, net asset charge, asset-management charge, and so forth.
Half a percent here. A quarter percent there. How much could such tiny fees possibly add up to?
Over time, hidden and excessive costs can add up to thousands, if not hundreds of thousands of dollars.
The U.S. law requires the fees charged to a 401(k) plan be “reasonable” rather than setting a specific level of fees that are permissible. Those fees will vary depending on the size of your employer’s 401(k) plan.
Some of the options available in your 401(k) may be “actively” managed. So they’re unnecessarily expensive. Yet, these are the funds that aren’t usually the best performers.
How to look for hidden fees and excessive costs.
On average, it’s 1.4% for small employers; 0.85% for medium-size employers; and 0.5% for larger employers.
To find the fees, take a look at your plan's summary annual report, aka prospectus. In the basic financial statement section, find two numbers: total plan expenses and benefits paid. Subtract the benefits paid from the total plan expenses.
These are not the most intuitive or user-friendly of documents. Thus, it may not be easy to find these numbers.
There may be a variety of fees you need to keep your eye on. According to US Department of Labor's 401(k) guide, here are the three main categories:
This is where you'll typically see the most variance among plan costs. These are the expenses for managing the particular assets your plan is invested in, as well as sales and commissions.
Plan administration fees:
These fees are the basic upkeep costs of operating your 401(k), to include "recordkeeping, accounting, legal and trustee services."
Individual service fees:
These fees are related to a plan's optional services or features that an individual decides to take advantage of, such as drawing a loan from the plan.
Note: The lowest-cost fund isn’t automatically the best.
The lowest-cost funds may not fit your allocation strategy. Depending on your investment objectives, you can compare funds with similar investment objectives to figure out where to invest.