Millions of people are saving for retirement while lowering their tax burden when they send their pre-tax pay to a 401(k). While all the financial gurus say that it is like getting free money, there may be problems that are worth exploring with the retirement accounts.
For starters, most people are just aware that it may lower their tax bracket and that is about it. They are somewhat cognizant that they are going to have some money for retirement through the magic of some far off people who are investing their money for them. End of the story, right? Wrong.
What many people do not realize is that they are unwittingly paying very high rates for their accounts to be overseen. These are known as custodian fees and are traditionally exorbitant. In fact, if people knew better they may think harder about how they are throwing their money away, and actually covering the burden of the custodian fees on behalf of their companies.
Yes, if you are wondering, such fees are significant enough to erode an individual’s return on their investment. Fortunately, the practice of overcharging in custodial fees has come under scrutiny by regulators in recent years. People who are aware of this practice have finally taken action in the form of complaints and lawsuits, and that is what has gotten regulators involved. In fourth-quarter 2015, 11 class action lawsuits were brought up against 401(k) plan providers.
What Are Normal Fees?
The fees that are normal versus those that are hair-raising are covered below. It is true that there are people behind the scenes who are making you money. They may be managing the funds that make you money, or may be in charge of company operations. There is actually a great deal of overhead to run an investment firm, especially the large ones poised to handle corporate 401(k) accounts.
Though, if the company occupies prime real estate, and just moved into a newer building, and they pass the added increase of 1 percent to your custodian fees annually, it would be like losing nearly 30 percent of your money by the time you hit retirement.
The first fee is called the Investment Management Fee. It is the feet that remunerate the portfolio manager who invests the money. It is generally factored into the account on a quarterly or a monthly basis. The administration fee is deducted from dollar amount from the 401(k). They keep records and make sure that the information in your account is up to date. The sales charge is another fee in the mutual funds in the 401(k). The sales fee is charged whenever a fund is redeemed or bought. It is added in separately on top of the administration fees and the investment management fee.
Are you putting money toward a variable annuity contract? Then you are paying added fees for costs related to insuring the plan. This is a charge levied by the insurance company that is in charge of the annuity contract. The death benefit, living benefits, and other riders will provide, in return, a guaranteed income stream at a specified age, which could be at retirement. It probably carries a benefit or a guaranteed minimum account balance for your beneficiaries, or heirs.
The new regulations require written disclosure to all 401(k) participants including the fees for the retirement plan. The challenge is that the fees are not so easy to compare across funds. The disclosures are hard to compare and difficult to understand. While that is the case, it is your responsibility to take the time to understand it because it can greatly impact your retirement savings.
Actions To Reduce Fees
Most people are invested in mutual funds, which means that they are assessed sales charges of between 1 to 3 percent. The same holds true for the variable annuity contracts too. It eats away significantly at your retirement.
Sure, it does provide guaranteed income, you may actually be better off investing in a low-cost index fund. They normally do not carry a hefty sales charge at all and carry nominal annual fees. Because they are related directly to the indexes, they do not require much investment guidance from an expert, which makes for low fees.
It turns out that it is nearly impossible to beat out the active fund management. That makes the index funds a great way to save for retirement. Find out if an index fund is available in your 401(k) and if not, whether it could be added to your account.
Considering buying exchange-traded funds, or ETFs, look for ones that invest in the market indexes. Just be aware of the commission. Remember, the reason you are in this is to save money not play the casino markets. Do not try to time the markets where your retirement nest egg is involved.
It makes sense to take the time to learn how much the fees on your 401(k) plan are costing you. Compare the anticipated return on an investment while factoring in the fees to see if a variable annuity or a mutual fund make sense for you or not.