Imagine embarking on a road trip. You know that you are going to have to pay for gas and food, as well as any maintenance to your car that needs to be done before setting out.
Chances are you'll travel along a toll road – another anticipated expense. It's not a stretch to expect each toll charge will be displayed before passing through and that you will have plenty of tollbooths to choose from – and each will charge the same as the one next to it.
But what if you had no idea what each toll charged? How would you feel if you found out you were paying more than the cars behind you and next to you? What if the toll was different on your way there than coming back?
Employees enrolled in 401(k) plans are facing the same problem.
The high fees hidden within 401(k)s are not standard throughout the industry, so employees could be paying more than friends, family or even coworkers with the same plan provider.
What's scary is that the majority of Americans don't know money is being sucked out of their 401(k) –and that's just the way most plan providers want it. A recent AARP study found seven in 10 plan participants weren't aware of the fees associated with their plan – much less hefty ones that vary from plan to plan.
In fact, did you know that there are three different kinds of 401(k) fees that chip away at your returns and threaten your retirement dreams?
In keeping with our tollbooth analogy, think of the first two types of fees – administration and record keeping – as necessary expenses as part of your trip. Typically, these fees aren't high, although there is no industry standard and few offer a flat-fee rate.
To avoid getting ticketed, your car's inspection and tags must be up to date. That's like administration fees.
Administration refers to the responsibilities of a third party to manage the intricacies of the federal regulations that govern the actual 401(k) code of retirement planning. In short, this group ensures your 401(k) is compliant.
Record-keeping fees are like the GPS for your road trip. The record keeper looks after the numbers for your business, and keep track of employee money. There are also the gains/losses on the funds that need to be entered each day. There's year-end reporting, calculation of vesting, numbers reported back for IRS tax forms and compliance testing, etc. The numbers are just as important as, if not more than, the legal aspects.
However, the most tollbooth-like confusion is found within the third fee coming out of your 401(k): investment fees. Investment fees are not standard among plans and are carefully tucked away so you don't know what you're being charged. These fees are why many employees' retirement dreams are at stake and why the industry needs drastic reform.
Fees vary from plan to plan, and can run anywhere from less than 0.5 to 2% of your 401(k) balance – a huge discrepancy. These fees are a double-edged sword: The larger your nest egg, the more you pay in the form of investment fees.
Despite the fact that your 401(k) is getting hammered by these fees year after year, there is little understanding of the total fee amount or the conflicts. A change is coming soon. The Department of Labor has announced new rules that go into effect this year aimed to bring greater transparency to these fees while allowing you to see exactly what you're paying.
Keep an eye out on how information is communicated to you, and if you're surprised by what you see, call the plan provider and ask about the scene and look for other options.
Your 401(k). Your tollbooth. Get to know them both!