Don't Lose Retirement Savings to 401(k) Fees
For many of us, the answer to that question is, most likely, never. And for the moment, it's not easy to get your hands on these numbers -- although that's going to change. This past October, the U.S. Department of Labor ruled that all employer-sponsored 401(k) plans will have to disclose fees on investments and transactions. But these new regulations won't go into effect until Jan. 1, 2012. So, for nearly another year, you could be paying too much -- and high fees add up fast.
Ryan Alfred, co-founder and president of 401(k) rating company BrightScope, believes "roughly 50% of all participants, and particularly those in smaller plans, could save money by moving to low-cost options within an IRA." If your 401(k) fees are too high, some companies will allow "in-service withdrawals," an option to move money into an IRA while you're still employed by the plan sponsor. Other companies won't (to see which side of the aisle your company is on, check your summary plan description). And if you get a new job, you can roll your old plan's assets into an IRA or into your new 401(k), if it's less expensive.
Here's what else you need to know:
Do some research.
It's fairly easy to find out what you're paying for the investments in your plan. You can plug the ticker symbols of mutual funds into a site like Morningstar.com, and it will spit back expense ratios. It's harder, however, to get access to other, noninvestment expenses that your plan charges to cover administrative costs -- things like accounting, legal fees and record-keeping.
You can generally request this information, but an even easier and perhaps more informative way to gain it might be to plug your details into the Personal 401(k) Fee Report tool on BrightScope. The calculator will generate an overview of the fees you're paying and tell you if they're higher or lower than average. It will also show the impact on your retirement savings, which can be huge.
Let's say your plan charges 0.40% in fees. BrightScope says the average fee for a low-cost 401(k) investor is 0.32%, so you're about 0.08% off. That may not seem like much, but in the example I ran, with an employee putting away $12,000 per year, that small difference could cost you over $40,000 by the time you retire, depending on the investments you've chosen.
Finding out your plan's fees is one thing, but how do you know if they're fair? The BrightScope calculator will give you a good indicator, but if you'd prefer to go at it alone, Alfred gave me a few rules of thumb. First of all, make sure you're comparing apples to apples: A plan with a billion dollars in assets will charge less than a plan with a million dollars in assets, simply because it has more negotiating power.
Alfred says a low-cost plan that holds a million dollars in assets might charge 75 basis points, while a low-cost plan with a billion dollars in assets might charge 25. On the high side, a plan with a million dollars in assets could cost well above 3% in fees. Billion-dollar plans charging over 1% would be considered high.
The biggest expense in most plans comes from the investments themselves, so you always want to check those costs, "An index fund should charge less than 50 basis points," says Alfred, "and an actively managed fund should be less than 1% of assets." Fortunately, these costs are also the ones you have the most control over.
On the trickier side are those administrative fees charged by the plan itself. If you find these are too high and you can't roll them to an IRA, try talking to your benefits administrator or your HR department. Ask how they're making sure those fees are reasonable, and ask if they've benchmarked them to see how they stack up against other plans.
Also ask how the fees are allocated, suggests Alfred. "For the most part, fees are allocated based on assets," he says. "If you have a large account balance, you'll pay more in fees. Let's say there is a fee for educating investors, and you don't use those resources -- you might be paying to educate other people."
On the other hand, if the plan doesn't base these fees on assets, and they're instead charged per capita, smaller account holders will get wacked: "Let's say everyone pays for record-keeping, and it costs $150 a head," says Alfred. "For a small accountholder who has $1,000, that's 15% of their account balance. That may not be fair."
It's a gray area, but you at least want to know how the fees are distributed in your plan.