If you contribute regularly to a 401(k) plan, you’ve already begun to take control over your retirement. Each contribution adds up. And with interest, you could increase your retirement income substantially by the time you’re ready to use it. But because few things in life are free, 401(k) fees could take a bigger bite out of your future income than you realize.
The fees associated with 401(k) plans are logical and above-board. They are assessed for a reason, but that doesn’t lessen the effect they have on your investment. Understanding those fees and what they’ll really cost can help you adjust your contributions, if possible, and diversify your retirement savings strategy. That can give you more security and better control over your income once you’re no longer in the workforce.
Here are some of the most important facts about 401(k) fees and how they affect you:
Fees Can Directly Reduce Your Retirement Income
Although some fees may be paid by your employer or by you directly, many are taken from your investment returns. The U.S. Department of Labor explains that your plan will have a certain overall average return by the time you retire. This return is what you might expect your retirement income to grow by.
But with fees considered, the return is reduced. The Department of Labor’s example shows that while $25,000 with an average growth of 7 percent could grow to $227,000 in the span of 35 years, reducing the return by 1.5 percent in fees means the same $25,000 would only grow to $163,000.
Suddenly your retirement is less than you’d planned for.
Fees are Assessed for Different Services
There’s generally no singular fee associated with 401(k) plans. Instead, there are different fees, each for a different purpose. Not all plans will have the same fees, but some are relatively common.
The Department of Labor gives examples of three different fee categories. There are administrative fees, investment fees, and individual service fees. For each category, there are different fees that may apply to your plan.
Administrative fees are just what they sound like. They cover the general management of the plan for services such as record keeping, phone access to a plan administrator and legal / trustee fees. These are either paid by your employer, or they’re deducted from the total assets of the employer’s plan.
If they’re charged against the plan assets, each employee may pay a different percentage based on his or her plan value, or there may be a flat-fee arrangement. The different ways this fee may be applied shows how different the effect might be on your investment.
Investment fees are the ones that take out the biggest bite from most plans. This is a fee that’s assessed for the management of plan investments, and it’s deducted straight from your returns. The investment fee is generally a percentage of the total investment. So the more you contribute to your plan, the higher this fee becomes.
Individual service fees are the wild card. You may encounter these if you ever need to take an early withdrawal, which is a double whammy. You’ll pay a fee when you withdraw, and you’ll have more due to the IRS at tax time. The individual service fees cover any special handling or services that you choose for your 401(k), so as such, you might be able to avoid most of them.
Contributing to a 401(k) is a smart way to plan for your retirement, especially when it’s part of a diverse strategy. Because your contributions are limited, relying on it alone for a healthy retirement income is risky and could leave you unprepared. Considering the fees involved, even if you max out your contributions, you still won’t receive as much as you might have thought.
Talk with your employer’s plan administrator to learn more about your 401(k) plan. You should receive a packet with general information about fees, when they are assessed and how often. Fees are part of any investment. You’ll pay for the service of handling and managing your money, regardless of where you choose to invest. If you pay attention to fees, they won’t have a chance to blindside you.
NewRetirement can help you plan a more diverse strategy. Check out the retirement calculator, see where you stand now, and learn what you can do to secure a better retirement income later.
