4 Ways to Tell If Your 401(k) Is a Bad Egg

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By Donna Fuscaldo

Do you know how much you're paying for your 401(k) investments? If the answer is "No," you're not alone. In an AARP survey of 401(k) plan participants' awareness and understanding of fees, 71 percent of respondents said they did not pay any fees at all.

Department of Labor regulations now require more fee disclosures when it comes to 401(k) plans. But 401(k) fees come in so many flavors and layers that, chances are, even the most savvy investors don't have a clear understanding of what they're paying.

There are plan administration fees, investment fees, individual services fees, third-party fees, sales charges and management fees. These fees vary from firm to firm and fund to fund, and they can often be found buried in your quarterly or annual fund statements. Unfortunately, many investors don't take the time to review them, setting up a situation where they end up with pricier investments than are available to them -- be it in the same plan, or other retirement savings vehicles, such as IRAs. The good news is, there are ways to easily tell whether or not a 401(k) plan is too expensive. Here are four:

1. Does the 401(k) Plan Manager Have a Transparent Fee Breakdown?

Other than listing the fund's expense ratio, the industry isn't required to disclose where the money goes, making it easy to bury fees, says Greg Carpenter, founder of Employee Fiduciary. Which is why one sign you might be paying too much is when your fees aren't broken down on your statement. "If you see fees going to the financial adviser and/or the record keeper, chances are you are getting a good deal," Carpenter says, "because there isn't any place to hide the fees."

2. Are Your Funds' Expense Ratios Higher Than Most?

A fund's expense ratio is typically listed under an "expenses" or "fees" tab (or section) in the fund's prospectus. Jared Snider, a wealth adviser at Exencial Wealth Advisors says that investors shouldn't be paying more than 40 basis points for funds within a 401(k) plan. Yet, the median 401(k) investor in a data analysis by San Francisco investment firm SigFig pays 49 basis points.

3. Are Cheaper Share Classes of Your Funds Available?

Many people don't realize that fund companies offer as many as seven or eight share classes of a particular fund, says Carpenter. You may be paying as much as 1.5 percentage points more than an investor in another share class in the same fund, he says. The kicker: the higher the expense ratio will directly lower the returns of your fund, compared with the fund's other share classes with lower expenses.

American Funds, for example, have six classes for funds, with expense ratios of anywhere from 67 basis points to 1.24 percent, Carpenter says.

Going back to expense ratios, even 67 basis points is high. As you can see from the chart below, the average expense ratio paid by investors who have a Vanguard-managed 401(k) plan is 0.27 percent.

4. Are Your Returns Unimpressive?

Granted, past performance is not an indication of future results and chasing returns with no regard for volatility isn't smart. But you can get an idea of how your 401(k) is doing by comparing your rate of return to that of similar investments in your other accounts or -- why not? -- the performance of other investors with similar goals and risk appetite.

Not ready to broach that topic at your next college alumni reunion? Take a look at the chart above, which compares 401(k) plan performance and fees for 11 companies over the 12 months ending Jan. 20. While the data is aggregated for all plan participants who use SigFig's portfolio tracker, regardless of age, risk tolerance and investment choices within the plan, lower-cost plans stand out with better returns.

Finding out how much you are paying in fees is half the battle. Lowering those costs could win the war. The three easy steps below will take you that much closer to that victory.
  1. Review your 401(k) investing options carefully. Choose index funds or exchange-traded funds, where you aren't paying for someone to manage your investments actively. "Passive funds are going to have lower expenses," says Snider. "Actively managed funds incur more costs and research has shown [that] whenever you drive down the cost of participating in the markets as an investor, you gain more return."
  2. Don't see any low-cost investing options in your 401(k)? Ask. Call your company's human resources or 401(k) plan administrator and see if there is anything they can do to add low-cost funds to your plan's lineup.
  3. Evaluate other retirement savings options. If your employer offers a 401(k) company match, by all means maximize it. But once you're contributing what you need to get the full matching contribution, you may consider other retirement savings vehicles that have more, potentially better investing options. Depending on your income, you may be able to put as much as $5,500 in an IRA in 2015. Open an account at a low-cost brokerage firm and max that out, rather than contributing to a higher cost 401(k) beyond a company match.
Donna Fuscaldo is a contributing writer at SigFig. Nearly a million people use SigFig to track, improve and manage over $300 billion in investments.
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