Are There Hidden Fees in My 401k Plan?
The 401k plan came into being in 1978, during that time it has become the most popular employer-sponsored plan for retirement. Millions in American workface rely on the money they saved in this plan when they reach the age of retirement. With the popularity of the 401k, many people have never thought about the underlying factor of hidden fees. So, are there hidden fees?
There are fees linked to the 401k plan, which are never visible in a balance statement. If you understand these fees, you can take control of your savings for retirement.
The 3 Types of Fees
There are three fees attached to the 401k plan: Asset Based Fees, Plan Administration Fees and Service.
Asset Based Fees
Asset based fees come in many forms, but are stated in your account statement because they are deducted your assets. There are three main types of asset-based fees:
- Management Fees. Fees usually deducted for the services of the person who actively chooses the stocks the funds will hold.
- Expense Ratio. It is the entire operating costs investors pay to a fund. Usually these funds are less than 1% but can be as low as 0.2% like that of the low cost index funds.
- Investment Advice: The employer pay these fees for the advice they get on their choice of investments. These fees are separate and apart from the expense ratio fees.
Plan Administration Fees
Plan administration fees vary in amounts depending on the deal the employer worked out. Large companies often get a better deal than small companies. The fees are paid on a fixed schedule per quarter. These fees include:
- Record Keeping and Accounting Fees. These fees include services like observing employee matching and income sharing contributions, monitoring vesting schedules, and conducting audits that are required by law.
- Custody and Trustee Service. This fee is for the custodian who holds the plan assets. The stock certificates need to be kept somewhere.
- Other Administration Fees. Fees include customer services, things participant education, and the plan’s website.
Transaction and Service Based Fee
These are fees charged to a plan participant for completing a particular service:
- Loan Fees. These fees will be deducted if you try to take out a loan against your 401k. In this case, the administrator may charge you a one-time loan administration fee.
- Paperwork Fees. Other circumstances may arise requiring you to pay additional fees such as in a divorce incident. For this the plan administrator may require a fee to split the couples’ asset
There is a big advantage that the 401k plans have over other methods of savings. It is also true that compounding interest of pre-tax money creates an exceptional way to boost retirement savings. Nonetheless, it seems like there is an unending variety of fees attached to these plans. Although they may look insignificant, they fees can create a compounding effect similar to that which small interest growth does during your portfolio growth.
As time progresses, these fees can eventually reduce your savings growth significantly. How significantly? Let’s say that every month you put $500 in your 401k plan for 30 years, generating 8% returns. Your final amount would be $745,179. However, with the hidden fees in your 401k plan your interest rate drops to 6.5% for the same period of 30 years. What is the value of your nest egg? The truth is that the 1.5% paid out in hidden fees pulls down your nest egg to $553,089. The reality is you have lost $192,092 due to hidden fees. That is why we encourage you, when it comes to your retirement plans; use your Roth IRA first!
The 401k is yours for the taking, the company match that is, but ensure you put the rest into an investment where the investment costs are not only visible but you can take control of it. An understanding of the fees in your 401k plan will help you make the best decision to reduce these expenses and maximize on your retirement savings.