Contributing to a 401(k) or other retirement account can be incredibly satisfying, but you may not realize how much money you’re spending on fees. In fact, your 401(k) may be charging you for a variety of things that you’re not aware of depending on how you use the account.This article will cover some of the most prevalent hidden fees in 401(k)s that could be draining money from your retirement fund. Remember to include all fees and other charges when determining how to use any extra cash.
Do All 401(k)s Charge Fees?
While some 401(k) providers don’t charge fees, the truth is that the vast majority of people with 401(k) accounts are paying at least some fees. Providers are responsible for managing the funds in the account and making sure everything runs smoothly.Of course, these fees aren’t exactly hidden, as the Department of Labor mandates disclosure of all fees from 401(k) providers. That said, you may not learn about those fees if you don’t take the time to read the account’s prospectus, which is available when you sign up and updated each year.You can also identify any 401(k) fees by reviewing each statement and looking for line items that represent fees. You may be surprised when you realize how much of your contributions are covering these costs rather than your retirement.
12b-1 Fees
12b-1 fees are one of the most common and well-known charges associated with 401(k) accounts, and they’re used for expenses related to selling plans to individual employers. Most 401(k) managers hire a middleman to market their accounts rather than making sales directly.The 12b-1 fee is legally limited to 1% of your total assets, but a single percent can have a substantial impact on your retirement savings. They’re typically listed as a “marketing fee,” and you’ll be charged the same percentage each year (assuming your provider doesn’t change the rules) regardless of how your assets performed.You’ll pay more in 12b-1 fees as you continue to contribute to your 401(k), so they have the potential to drain a significant portion of your portfolio. In contrast, many other fees are flat rates that don’t increase over time or as your investment grows.
Administration
While the 12b-1 is intended to help providers market their accounts, administration fees cover the company’s own expenses. These could include anything from employee salaries and administration to legal and accounting costs, and administration fees can vary widely from one provider to another.Administration fees shouldn’t impact your portfolio as much as 12b-1s, and you probably won’t be charged more than $50 or $100 each year. Of course, even a small amount of money may constitute a substantial portion of your 401(k) if you’ve only been making contributions for a few years.On the other hand, your employer may pay some or all of your plan’s administration fees. This should be indicated in your employer’s prospectus, so review a recent statement for more information. Depending on the terms of your 401(k), it may be worth moving some of your investment to an IRA or another form of retirement savings.
Investment Advisory
Some retirement plans are passively managed, but others rely on investment managers to determine the best way to invest retirement contributions. Account providers generally charge advisory fees using a certain portion of your assets. Like 12b-1 fees, investment advisory fees will cost more and more as your portfolio grows.A 1% advisory fee, for example, would only lead to a charge of $25 if you opened an account and made a $2,500 contribution. That said, it would grow to $250 once you reached a balance of $25,000, and it could be thousands of dollars by the time you reach retirement.Advisory fees apply to 401(k) accounts as well as a variety of other accounts. You may still be charged if you make an independent investment, but you could also put your money in a passively managed investment. A 1% fee on all assets is worth it if the account generates 2% higher returns than a passively managed alternative.
Load Fees
Load fees are charged by mutual funds when you buy or sell, although some funds charge load fees at both times. Fees charged at the time of purchase are known as front-end while those charged when you sell the stock are called back-end.Most mutual funds charge around 1% to 3%, although some are significantly higher. Depending on the way your fund’s load fees are structured, your current balance may or may not accurately represent the value of your account. If you’ve accumulated $100,000, for example, you may only have $97,000 after applying a 3% load fee.Again, load fees are typically associated with actively managed funds, so you won’t be responsible for them if you’re contributing to a passively managed investment with your 401(k). Load fees may also be referred to as redemption fees or deferred sales charges.
Transaction Fees and Commissions
Some brokerages and account providers charge fees or commissions on each individual transaction, giving you an incentive to hold investments for as long as possible. Fortunately, transaction fees are getting less common as digital investment services become more prevalent.If you’re being charged for every transaction, you should try to buy and sell as much as possible whenever you want to adjust your portfolio. This helps you spend less money on transaction fees compared to the total value of the transaction. A small $10 charge will add up to a lot over years of investing.401(k) fees can be complicated, and you may not realize how much of your investment is going to a variety of additional charges. It’s important to review your plan’s prospectus every year to learn about any changes. Don’t forget to take these and other fees into account when comparing different investment opportunities.
Author bio:
Logan Allec is a CPA, personal finance expert, and founder of the personal finance blog Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money.
