The Trap: Overlooking Invisible-Until-Now 401(k) Fees
A recent AARP study
found that 71 percent of Americans think they don't pay any fees for their 401(k) plan. Actually, every
401(k) plan out there charges fees to every single one
of its investors. For small plans, it can be as much as 2 to 3 percent of your investment. For large companies, it can be less than 1 percent, explains Mike Alfred, co-founder and CEO of BrightScope
, a company that analyzes retirement plans. This might sound like a teensy fee, but it can make a big difference. For example, imagine that you were to invest $15,000 total in a 401(k) fund that earns 7 percent interest and has a 6 percent yield. In 30 years, a fund for which you pay a 1 percent fee would be worth $86,152. By contrast, a fund for which you pay a 3 percent fee would be worth $48,651. So, a 3 percent fee means that your fund would have half the worth of a fund for which the fee is 1 percent.
It used to be that plan sponsors (i.e. employers) were not obligated to disclose the rate at which employees were charged for contributing to their 401(k) accounts. That has all changed as a result of new Department of Labor regulations
that went into effect July 1, 2012. The amount that you pay in fees must be made plain on your statement, just like your bank lets you know when they've charged a fee to your account. It may be in the fine print on page 7 of 8 in an attempt to dissuade you from looking for it, but it's definitely there. The next time you receive a statement, take a look and figure out what kind of fee you're being charged. If you're concerned by it, dig out that HR packet and see if your company offers plans with different fees. Then, if it does, make a note to remind yourself to change funds during the opt-in period that usually happens at the end of the year. (If your company doesn't offer reputable funds with low fees, you might want to talk to your HR department to see if they will be including one for the next opt-in period.)