Did you know that your employee sponsored 401K plan is able to charge you fees beyond the management fees of the funds that you invest in? It’s kind of the dirty little secret of 401K plans. Up until a few years ago, I had no idea that these 401K fees existed and just thought that my employer covered all fees as a benefit to me. Wrong!

This is National Save for Retirement Week, so it’s only natural that we take a look at the frugal aspect of retirement savings here on MicroFrugality. It turns out that a little frugality, when compounded over decades, can have a profound impact on your retirement plans. According to the U.S. Department of Labor website:

“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.”

That’s worth repeating (and bolding): 1 percent in 401K fees can reduce your retirement balance by 28%.

Where do these fees come from?

401K Fees Fall into 3 Categories:

1. Plan Administration Fees

2. Investment Fees

3. Individual Service Fees

Where can you See your 401K’s fees?

1. Your plan administrator should be able to provide you with a list of fees.

2. Your annual account statement should list all associated fees.

3. Your 401K should have a summary plan description (SPD) that separates what you pay and what your employer pays. This is given to you when you begin your plan and every 5 years.

Where Am I Going with this?

Not knowing what your 401K is costing you prevents you from taking frugal action. If you know your fees, you can:

1. Determine if it makes sense to switch to roll old 401K’s into your present 401K if it’s cheaper.

2. Determine if it makes sense to roll old 401K’s into an IRA that may be cheaper.

3. Determine if it makes sense to just get your employer’s match in your 401K and then work on contributing to a cheaper IRA.

Final Thoughts on 401K Fees

This is definitely a case where a little bit of homework (half an hour or so) can literally shave or add years to your working life. So get motivated to look into this and seek professional advice if you need to!

FrugalHead Discussion:

• Did you know that your 401K charged you fees beyond trading fees and mutual fund management fees?
• What kind of fees have you been paying to use your 401K?
• Does this make you want to switch to an IRA?

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