Warning: This Could Be Draining $155,000 From Your 401(k)

posted on 06-07-2019

Could you be wasting $155,000 that should be going toward your retirement?

We’re told that we need to save for retirement. We’re also told that tax-advantaged accounts, usually offered by employers, are the best way to build a nest egg.

Your 401(k) is supposed to represent one of the best retirement savings strategies out there. It’s easy to invest in a 401(k) -- your employer probably offers a plan in which you can have the money automatically deducted from your paycheck.

However, if you are investing in a 401(k), you might end up throwing away $155,000 over your lifetime.

Here's how:

First, ask yourself: How much are you paying in retirement account fees? Because that's what may be draining your 401(k).

Even with the new 401(k) statement rules, you might have no idea what you’re paying in fees. In fact, a recent InvestingNerd (a division of NerdWallet) study found that a staggering 92.6% of Americans "dramatically underestimated the total 401(k) fees the average household will pay over the course of a lifetime."

By the time all of your fees are added up, according to public policy organization Demos, you could be as much as $155,000 -- or more -- poorer over your lifetime.

What could you do with that extra money?

More importantly, how much would that have added up to if you had been able to compound the money over time?

Every retirement account comes with fees. Here's what you might be paying:

  • Expense ratio: This is the annual cost of the funds in your retirement account. There is no avoiding this retirement account fee; all funds come with expense ratios. However, you can limit your fees by choosing funds with lower expense ratios. Some companies use retirement management companies that pad their earnings by recommending more expensive managed funds with higher expense ratios (and commissions). There are plenty of funds out there that charge less than 0.25% -- instead of charging more than 1%.
  • Operating expense: Most retirement plans come with operating expenses. In some cases, employers pass these expenses on to employees by taking it out of their retirement accounts. If the operating expense is relatively small, it can beat trying to invest on your own through an online discount broker.
  • Shared costs: In some cases, you might be part of "revenue sharing." In this situation, a service provider might get a rebate from high-cost funds. Extra fees that end up coming out of your retirement account are then shared amongst others, to help cover the cost of the others in a plan.
  • Mortality charges: If you have a 403(b) plan -- basically the 401(k) equivalent for non-profit and government workers -- there might be other charges. These plans often include products sold by life insurance companies, and there are extra expenses associated with that.
  • Other fees: Check your retirement account statement for others:.  There are myriad fees you could be paying.

Some experts believe that your total retirement account costs should be no more than 1% -- and it’s often possible to keep below that number if your employer can afford to pick up the operating expense, and if the funds chosen are low-cost.

The Investing Answer: If you find that your fees are too high, talk to your employer about finding a different plan administrator. You can also ask if lower-cost options can be added to the plan.

Or you can roll your 401(k) into an IRA, allowing you the ability to invest as you see fit, and look for the lowest-cost options. One strategy is to contribute enough to get an employer match, and then once that max is reached, you can contribute to a more cost-efficient account.