Do you know how much you are paying in fees each year with your 401K plan? Most investors don’t. I certainly didn’t always know this information. But over the last few years, I’ve discovered that 401K fees can be fairly significant, and can vary greatly based on the 401K administrator and the individual investments you are using.
How significant? Well, if your 401K fees are just a percentage point higher, it could literally mean hundreds of thousands of dollars of difference in the total return your retirement account generates. This also applies to you if you’re running your own small business and trying to find a small business 401K plan for you and your employees. It’s important to know what your paying. But before we delve into calculating your 401K fees, let’s look why these fees are so hard to pinpoint.
Pro tip: You can sign up for a free 401k analysis through Blooom and they will help you understand if you’re paying too much in fees. They will also look into how diversified your portfolio is and whether you have the right asset allocation.
Why Are 401K Fees So Hard to Find?
Simply put, 401K administrators make it hard to find fees. And before you think I’m picking on 401K’s, it applies to Roth IRA and Traditional IRA fees as well. When you first go searching for your 401K plan fees, it can be pretty frustrating. It’s not like your 401K administrator or employer sends you a bill at the end of the year that says here’s how much you owe us for managing your retirement. Wouldn’t it be nice if they treated us this way? But they don’t. My opinion is that this setup is a result of the transition from employer-controlled pension funds to employee-directed 401K plans.
Back when there were no 401K plans, there were pension funds. Employers controlled everything with regard to your retirement assets. When the 401K was created, investment companies stepped up to fill the gap as administrators. They, along with the company, set the rules about how to report information to you. Unfortunately, this meant making expenses an afterthought in their communications with employees. And as long as they (employees) weren’t asking, the employers and administrators weren’t talking about the expenses.
How to Calculate Your Fees
Let’s get to it. You should be able to calculate your 401K fees in just a few minutes. There are actually two types of general fees you will need to calculate: administrative and investment fees. Administrative fees are the hardest to locate and the least understood. Investment fees are based on the individual funds or investments you have within the plan.
Figure Your Share of the Plan’s Administrative Costs
It costs money to run the 401K plan. Sometime these expenses are passed on to you. To find the fees, first locate your plan’s summary annual report. On this report, you will see a basic financial statement section. Here, you will need to find two numbers: total plan expenses and benefits paid. Subtract the benefits paid from the total plan expenses.
Next, you will divide that number by the total value of the plan. The resulting number is your plan’s administrative cost percentage. Multiply the percentage times the total value of your holdings within the plan to get the amount of administrative costs that you paid for during the year.
Calculate Your Individual Investment Fees
If your investments are managed by an investment professional or financial advisor (as most mutual funds are), that person needs to get paid for their efforts. To locate these costs, find the fund expense ratio on the latest fund prospectus. Multiply that expense ratio by the total amount you have invested in that fund. Do this same calculation for all of your funds. Finally, add up all those expenses and this is the total investment fee for the year.
Now What? What Can You Do About Fees?
Unfortunately when you have high fees in your retirement plan, there’s not much you can immediately do about it. But just the knowledge of your fees will help you answer questions like:
- “Should I consider investing in different funds within my plan?
- “What should I do with investment dollars after I reach my company 401K match?”
- “Should I leave my company’s 401K plan because of the absurdly high fees?”
- “Should I divert funds to a discount online stock brokers?”
- “What should I do with those funds once I leave my job?”
Luckily, the tide is turning, and we are seeing new pressure from U.S. lawmakers to make this fee information more apparent. Sites like BrightScope are also doing a good job of exposing the truth about the company 401K plan.
This guest post is from PT Money: Personal Finance. Follow along as PT discusses things like the best places to store your short-term cash, how to spend your money wisely, and the best cash back credit cards to earn more money on your spending.