401(k) accounts are a great nest egg that you spend years contributing towards and finally reap the benefits of post-retirement. When you sign up for a 401(k) with your current employer, the process is simple; contributions from your monthly earnings are automatically deducted and charged towards the upkeep of the plan.
For many individuals, this convenient functionality induces a false sense of security, as they believe they’ll have hundreds of thousands of dollars saved up by the time they retire. Many individuals do not thoroughly investigate the minutiae of the plan and are unaware of the hidden fees that a contributor is charged.
As such, retirees face massive disappointment when they realize their savings portfolio isn’t as vast as they had originally anticipated. Continue reading to learn about 3 facts about 401(k) plans that remain obscure; contributing towards higher costs and possibly reducing the size of your benefits.
1. Hidden Fees
Americans are generally unaware that they pay for their 401(k), and that expenses are deducted from the account balance. One well-known fee is the charge of the mutual fund company that manages your 401(k) account, which ultimately affects your returns. Additionally, there are certain other fees that account owners are unaware of.
Recent laws by the U.S Department of Labor require the 401(k) provider to disclose all fees in a prospectus statement that is mailed to account owners once a year. Even though account owners have access to this information, the nature of 401(k)s draw confusion.
Of the several types of fees you are charged, some are charged even before investments have been made through 401(k) contributions! First comes the marketing fees for the intermediary who sells a 401(k) plan to your company; they take a 1% commission on assets.
Investment Management Fee
Second, an investment management fee that is charged by the company that manages the investment fund; they charge you for the expertise involved in managing your portfolio. These fees can vary among the management companies, going as low as 0.10%, or more than 2% of all assets.
Third, an administrative fee is charged for daily operations such as simple bookkeeping, maintaining websites, account statements, and offering customer services. This fee is divided among all the participants of your employer’s 401(k) plan. Generally, administrative fees are set figures valued at $100 to $200.
Lastly, there are service fees that each individual is charged. These fees are charged for special plans such as utilizing a brokerage window, or for distributions such as 401(k) loans, and hardship withdrawal. Service fees range from $20 to upwards of $150, dependent on the transaction being made.
These fees together drastically reduce the quality of your retirement as each dollar spent towards them is a dollar less you have to spend during your retirement. As an investor, it is up to you to carefully read the Prospectus statement to keep yourself updated with all costs.
Having understood the hidden fees, it is pertinent to explain other hindrances that many individuals fail to consider, or have no knowledge of. Employers offer matching contributions which is to say that your employer contributes or “matches” a set percentage in recognition of your own contributions towards the 401(k).
For example, if you earn $100,000 and contribute 5% towards ($5000) the 401(k) plan, your employer will make a matching contribution of $2500, which is half of your contribution. However, participants looking forward to this, fail to realize that their claim to these contributions depends on whether they have been working for their employer for the prescribed time period or not. The required duration can vary and is known as the Vesting Schedule.
For account owners to become 100% vested towards their matching contributions they must work up to 5 years at times for a certain organization. This is done to eliminate employees to participate in a plan receive contributions and leave within days taking the entire sum of money. A vesting schedule forces employees to remain committed to their organization. Many employees fail to consider this and leave work prematurely ultimately reducing their bonuses.
Certain savings funds have more padding than others. Which means that the revenue sharing fees paid by certain participants are higher than what is charged to others contributing towards the same plan.
Example: If Doyle and Tim work for Vanity, and Doyle contributes his money towards a particular index fund which offers a 0 revenue share. Meanwhile, Tim puts his money in a fund that offers a 2 percent revenue share.
Depending on how the plan is set up, each fund is either credited to a particular participant or reflected back at the plan level. If the latter is true, Tim subsidizes Doyle while paying a higher fee. This becomes a hidden cost that many 401(k) participants are ignorant of.
In this last example, you can see why you need a trusted retirement planner to help you navigate this. 401Ks rank up there with misunderstandings about Social Security. Be sure to get your Social Security Analysis. You’ll save $5,000 guaranteed or your money back!