Retirement Fees: Are You Paying Too Much?
“If after ten minutes at the poker table you don’t know who the patsy is – you’re the patsy.” -Klingon Poker Proverb
No one wants to be the patsy at the table, but when it comes to fees paid to funds in your retirement plan, there are plenty of patsies at the table. The latest edition of the 401 (k) Averages Book shows that on average, 1.5% is deducted annually from 401(k) accounts due to fees. Smaller plans often have higher deductions and I recently saw one plan with nearly 3% deducted in fees. 1.5% doesn’t sound too bad, does it? If you had $10,000 invested in the stock market’s long-term average growth over 30 years, it would cost you almost $59,000 in fees! Is it sounding bad yet?
And employees aren’t the only ones at risk. Class-action attorneys are increasingly suing employers over high mutual fund fees being offered to employees in retirement plans. These suits maintain that high fees being passed to employees area violation of a plan sponsor’s fiduciary responsibility. And employers cannot just set it and forget it when selcting funds. This is a task that must be monitored on an ongoing basis.
The good news is that the Labor Department requires 401(k) fee information for each investment to be provided to plan participants.
Investment research company Morningstar looked at expense ratios and the Morningstar rating for funds and reached the conclusion that expense ratios “are still the most dependable predictor of performance.” With that in mind, here are some ideas that an individual can do to keep retirement fund expenses at a minimum:
- Low Cost Funds – Use the investment information provided by your plan to choose low-cost funds that meet your investment allocation criteria. Low-cost index funds can be a good alternative.
- Aim for less than 1% – Investment expenses vary based on the type of funds in which you invest. Try to keep the weighted-average of portfolio fee expenses under 1%. Passive investments, such as index funds and exchange traded funds (ETFs), generally have lower fees than active management funds and are a great alternative.
- Plan options – Make sure your plan has some low cost opinions. If it doesn’t encourage your employer to add some.
Mainly, you need to be aware of the fees you are paying. As pointed out above, it doesn’t take much for these fees to have a material impact on your retirement savings. And next time you look around the table, you won’t be the patsy.