Have you ever taken a look at your 401(k) plan and thought to yourself, “These options are terrible. The historical rate of return is low and the fees seem higher than normal.” Typically, those of us that say this just shrug our shoulders in defeat and sign up for the funds that look the best to us.
This does not have to be your only solution, however. In fact, putting your money into those high-fee funds might actually be your worst solution. As was discovered in a recent story covered by NPR, a high-fee investment fund compounded over 30 or 40 years could equate to hundreds of thousands of dollars that you will never see. All because your money had been going toward fees all those years.
How Do You Know?
Small-to-medium sized companies are often the targets of a high-fee fund package. The owner typically doesn't know all that much about investments and merely chooses a package based on which salesperson he feels the most comfortable with. He often isn't choosing a bad package on purpose, he's just ignorant to his selection.
So how can you know if fees are eating away at your future retirement dollars? While the fund companies often try to hide the fees they are charging you, it is required that they disclose this information to the public and especially to their prospective investors. This information can most typically be found on the site where you would make your 401(k) plan selections.
Open up your investment page and search for “Plan Documents”. Here you should see any plan changes that have happened recently as well as the fund fact sheets for each investment fund offered to you through your company. By simply clicking on a fund fact sheet, a PDF summary of all the fund information will be there in front of you. To find the fees you are being charged, look for the words, “Gross Expense Ratio”. On average, this ratio will 1.00 or less (meaning, 1% fees or less). If your funds average 2% or more, then your company is offering you a terrible platform for your retirement savings.
What Can You Do About High Fees?
If you research the funds within your 401(k) plan package and find the fees to be outrageous, what can you do about it? You really have two options:
- Let the owner know (or, if you work for a large company, meet with HR and discuss the above-average fees)
- Invest for your retirement on your own
Before doing anything, I would calmly let a person of influence within the company know about the fees that are currently being charged to the employees through the company 401(k) plan. Many owners will thank you for bringing this to their attention and might actually look into a different fund package in the future. Do not expect the change to be immediate, however. For many companies, the shareholders are the most important people to consider, and since this has nothing to do with the bottom line, the change over will likely be slow. Also, the company might have to wait for a contract period to expire before making the switch to a new fund provider.
In the meantime, don't be afraid to start investing on your own. Thanks to the internet, this can be extremely easy. Simply set up an account through one of the well-known stock trading sites, take a look at the options provided (there are likely many), and choose funds that have a proven track record with low fees. This will allow you to hopefully earn a profit on your investment and pay minimal fees while doing so.
What if your employer offers a company match? Since the company match essentially immediately doubles the amount of money that you contribute (this is the likely scenario anyway), it would probably make the most sense to put in an amount that earns the full match. Beyond this, further contributions should be made to your own investment account with the lower fees.
Do Your Own Analysis
If you want to find out what you are spending on 401(k) fees, there is no better tool than the 401(k) fee analyzer from Personal Capital. Narrow Bridge Finance editor Eric saved hundreds of dollars per year after looking at his own fees. Give it a try today to find out how much you can save!
Is your company fund charging high fees? Be sure to check before it's too late!