Most expert advice on financial planning for retirement includes a discussion of 401K plans. After all, your 401K plan is perhaps your largest financial asset. It’s supposed to provide you with income for life – allowing you to be able to retire comfortably. In some cases, it might even help you enjoy the dream of early retirement. And, if your employer doesn’t offer a pension plan (and fewer and fewer are these days), then your 401K combined with Social Security is likely to be your primary source of retirement income.
However, a recent AARP survey revealed that 71 percent of participants in a 401K plan believe they do not pay any fees, while 62 percent reported they don’t know how much in 401K fees they’re paying. There are good reasons for these responses: many 401K plans are loaded with hefty fees which are completely hidden from participants.
These hidden fees can eat away at your retirement savings. For instance, some 401K plans cost participants as much as four percent of invested assets per year. Even a plan charging an annual fee of 1.5 percent is likely to return roughly 17 percent less over a 20 year time period than a plan that costs just 0.5 percent. For the typical retiree, this can amount to a loss of $100,000 in their income from their retirement nest egg. As you can see, while the fee percentage may appear small, due to the magic of compounding, it can significantly eat away at your retirement savings.
Let’s take a look at some of the most common 401K fees you could be paying, without even realizing it:
- Management Fees/Advisory Fees – If your plan is run by a fund manager — meaning a manager makes decisions as to what the fund will buy and hold, you’re likely paying a management fee.
- 12b-1 fees – Fees paid by the plan participant for account distribution, servicing, and sales.
- Expense ratio – This fee is specific to the fund invested in, and refers to the total fund operating expenses.
- Wrap fees – Wrap fees represent management, marketing, operations, and administration fees for group annuities.
- Record keeping fees – Typical record keeping fees include monitoring employer matching, employer deferrals, vesting schedules, audits, and more.
- Custodian fees – Fees paid to a custodian or trustee for holding of the fund’s assets.
- Sub-transfer agent fee – Fees paid to a third party subcontracted to execute or maintain records.
- Trading costs – Costs paid by the participant for costs of making plan trades.
- Set-up fees – Simply put, these are fees to set up the plan.
- Conversion fees – Fees paid by the plan participant to change the plan’s provider.
- Special transaction fees – These fees run the gamut. They are fees passed on to the plan participant for special transactions, such as loan origination, investment transfer, splitting of assets for divorce, redemption fees, plan withdrawal fees, or provider termination fees.
Fortunately, there’s new legislation coming to address this serious issue. As a result of many litigation suits filed by employees and investors who found out after the fact that they were paying substantial hidden fees to investment managers of their accounts, the United States Department of Labor is implementing its 401K disclosure requirements “Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k) Retirement Plans“. As a result of this rule, individuals, small businesses, and large corporations will get needed information on the true cost of their own retirement plans.
The effective date of the rule has changed a number of times, but as of now, the rule becomes applicable for calendar year plans on January 1 of this year, and all other covered individual plan years starting November 1. Investors and employees should see increased 401(K) plan disclosure starting this summer.