Stop Your 401(k) From Robbing You Blind

You know how much you pay for your mortgage payment, your cell phone bill, and your car payment. But do you know how much you’re paying for your 401k plan? You probably don’t, and that could be costing you tens of thousands of dollars. Because we don’t actually have to write a check to pay for the fees associated with our 401k we never think about what it’s costing us. A few dollars here and there doesn’t seem like much, but over time, and as your nest egg grows, these fees start to add up fast. In some cases they actually take years off of your retirement!

I know people (myself included) who have changed banks over a monthly fee being charged to their checking accounts. I know people who will drive an extra 2 miles just to save $0.03 on a gallon of gas. I know people who will spend hours clipping coupons to save $40 on their grocery bill. And I know that none of these people pay attention to the fees they’re paying for the funds in their 401k plans.

How 401k Fees Add Up

My fiancé recently “discovered” an old 401k from a job she had left a few years ago. She had a little over $40,000 in the account, all invested in a target date retirement fund with an expense ratio of 1.48%. She was paying ~$600 per year in fees and didn’t even realize it! If she had just let that account sit until retirement, she would have ended up paying over $100,000 in fees. $100,000! Most people have to work a few years to make $100k, and here she could have saved that amount of money just by being aware of the fees she was paying inside her 401k. It’s so simple, yet so many people never give it a second thought once they start contributing to a 401k.

Analyze Your 401k

I mentioned Personal Capital’s 401k fee analyzer in my original Personal Capital Review, and it’s still the best way I’ve found to get a handle on exactly what you’re paying in 401k fees. Simply, sign up for Personal Capital (it’s free), connect your 401k, then click “Investing” -> “401k Fee Analyzer” to get your results, which will look something like this:

personal capital 401k fee analyzer

That’s the analysis from our “lost” 401k from before. It was invested in a target date mutual fund just like millions of other Americans who don’t want to hassle with rebalancing and checking in on their investments, and we would have lost 7 years worth of retirement income to mutual fund fees. It’s scary to think about how fast it adds up, just imagine someone who maxes out their contribution each year and has a 401k worth a few hundred thousand dollars. They’ll end up paying thousands each year in fees if they aren’t careful!

How To Save Your 401(k) Before It’s Too Late

- Sign up for Personal Capital and run your 401(k) through the fee analyzer.

- Look over the investment options your 401(k) plan offers you. Is there a similar fund with lower fees? Usually index funds will have the lowest fees of anything you’re offered. So if you’re invested in something like a “Large Cap Growth” fund, you’re probably better off switching to an S&P 500 index fund. It’ll cost a whole lot less in fees, and you’ll be invested in just about all the same stocks. The same goes for your other asset classes: The Russell 2000 index fund will cost you much less than that “Small Cap Value” fund you’re in and will probably perform better over the long haul as well.

Some 401k plans are better than others, but just about everyone should have a variety of low-cost index funds available in their plan. Because 401k’s offer us such limited investment options, your best bet is to probably stick to the index funds and ignore the “growth” “value” or “blended” funds that will just suck more money out of you without producing superior results. Remember, actively managed funds rarely outperform index funds over the long haul. In fact, between 1997 and 2012 index fund portfolios outperformed comparable portfolios holding actively managed funds 82% of the time!

The 401(k) is still the most powerful tool we have to save for retirement, while we can’t avoid fees altogether we can, and should be mindful of what we’re paying and look to minimize our costs as much as possible.

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12 Responses to Stop Your 401(k) From Robbing You Blind

  1. Fees definitely eat up a big chuck of your return. I wrote a post about this last month also. I don’t remember the exact number, but a 2% expense ratio eats up something like half of a potential return (5% vs 7%) over a 35 year time horizon. For this reason, in conjunction with limited offerings and a plan for early retirement, I only invested enough to get the company match. In my opinion, most 401ks are a pretty mixed bag
    -Bryan

  2. Holy crap! You never think about it, but it adds up over time. I only invest in Vanguard funds. As soon as Vanguard funds were available in my 401K I switched them over. My fees dropped from 1% to .04%. My 401K has admiral shares!!! So exciting. I’m, also, working to get some of my funds to over $10K, so they can convert to the lower fees index funds.

  3. So I just looked at my 401K fees through personal capital. Over the next 20 years, I will lose 12% to fees. Almost $40K to fees. And that’s with Vanguard low cost Admiral shares. It’s equivalent to one year of retirement according to PC. Holy Crap….

    • Only losing 1 year is probably pretty good. You usually can’t beat Vanguard when it comes to low fees, I wish I had access to their funds in my 401k. I think I was losing 4 years of retirement the last time I ran my 401k through!

  4. Typically the index S&P funds have the lowest fees, and do the best. Anytime you deviate from the standard index, it gets more expensive.

  5. The unfortunate thing is that many people just don’t care. I was all excited when the law changed and 401k plans had to disclose how much they charged in fees and there wasn’t any uproar about it. People are more concerned with deporting Justin Bieber than they are with their own financial well-being.

  6. Integrator says:

    Wow…1%+ is terribly high…i think my expense ratio is a little less that 0.2%

  7. It’s sad how much the financial services industry rips people off for very little value added.

  8. Evan says:

    My 401(k) is TERRIBLE! Every fund has an expense ration of above 1%! Ridiculous, but what choice do I really have? Can’t get a match anywhere else lol

  9. Tre says:

    Unfortunately I think many people are overwhelmed with the 401k and don’t understand how the fees work. I’ve tried to organize lunch & learns at our office about the 401k & no one shows up. Most of them don’t even open the annual fee disclosures that are distributed.

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