Guest Post: The Fees That Eat Away At Your 401K

Erosion Control? originally uploaded to Flickr by muffinman71xx.401K fees can be such a complicated topic — so when the good folks at DailyWorth offered to guest post I jumped at the chance to have someone wiser than myself cover it! – Kat

Is your 401k plan costing you too much?

Many people don’t realize that they’re being charged a fee (or fees) for participating in their 401k plan–and over time, those fees can eat up a chunk of your savings. (Pictured: Erosion Control? originally uploaded to Flickr by muffinman71xx.)

Shocked? You’re not alone. In fact, new federal rules requiring 401k plans to be more transparent about fees take effect in July — and women everywhere should sit up and take notice.

Keeping retirement fees low is critical for women, who tend to live longer than men and thus need to be vigilant about keeping investment costs low, so they can hang on to more of their cash.

Over 20 or 30 years, a fee difference of even 1% can swallow tens of thousands of dollars. For this reason, cheaper funds are often found to perform better over time–because the lower fees mean that you net a bigger return.

One of the most commonly talked-about investment fees is the expense ratio, which is basically a management fee charged by the mutual fund (and you probably have a few mutual funds in your 401k portfolio).

But some plans levy a handful of fees on top of expense ratios, such as administrative fees, and investment adviser fees.

The new fee disclosure rules will require your 401k provider to spell out what they’re charging you. Already some large 401k providers (Vanguard, Schwab, and Lincoln Trust, to name a few) are offering cheaper plans to small businesses–which means lower fees for employees.

“In an ideal 401k plan, the expense ratio for every fund option should be less than 1%, and the plan should offer index funds with an expense ratio of less than 0.5%,” says David McPherson, a financial planner in Falmouth, MA.

The heftiest fees in your portfolio–and the ones you have most control over as an investor–are expense ratios. As an investor, it’s relatively easy to compare the expense ratios of various funds to pick the best fund for you that’s also the least expensive.

For a quick overview of your retirement portfolio–including your average fees compared with the fees of a comparable portfolio–try plugging your holdings into Morningstar’s Instant X-Ray. Or compare different funds being offered by your 401k by using the FINRA fund analyzer.

If your all-in fees are higher than 1.5%, lobby your employer to switch 401k providers–it will save them money and help you keep more of your nest egg.

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Comments

  1. On the topic of economics says:

    On the topic of economics, did anyone else see this book review:

    http://chronicle.com/article/Law-Professor-Gives-Law/131815/?sid=at&utm_source=at&utm_medium=en

    Law Professor Gives Law Schools a Failing Grade
    By Katherine Mangan

    Law schools are bloated with too many underworked, overpaid professors whose salaries are supported by tuition increases that are making law school a losing bet for many students, a forthcoming book argues.

    Brian Z. Tamanaha, a professor of law at Washington University in St. Louis, delivers a blistering critique of his profession in Failing Law Schools, which is scheduled for publication in June by the University of Chicago Press.

    • Anon Cynic says:

      Of COURSE the problem is high professor salaries….it couldn’t POSSIBLY be U.S. News’ heavy weighting of expenditures per student OR schools treating law schools as cash cows. Argh. I’m going to be puking with HippieEsq….

  2. HippieEsq says:

    I think a lot of professors like to write law review articles, blog posts and books based on an incendiary title like “Law School is a Sham!” that contain the same old stuff that we have seen a hundred times, just to have their 15 minutes of fame.

    If I see one more article that says, “Most lawyers don’t make much money, are unhappy and law school administrations don’t care” I am going to puke.

    Cynically yours,

    HippieEsq

  3. Ferragamo sizing? says:

    Early TJ- looked around at the old shoe threads for this but couldn’t see anything. Sizing for Ferragamo shoes? Anyone have tips? I think my foot is on the wide side but I don’t currently own any wide width shoes. Should I go for it with the Ferragamos? I don’t live anywhere where I could try them on first. Also, do they fit TTS? Say for example in comparison to Cole Haan or Michael Kors?

    • I find Cole Haan really inconsistent when it comes to sizing, but I wear my standard size in Ferragamo shoes. I’ve never had to adjust up or down.

    • I think it depends on the style. I’m typically a true 7 but bought a pair of Carla’s (I think – it’s the classic black grosgrain bow front, with a medium-height stiletto heel) and sized up 1/2 a size when I purchased them. They fit like a true 7 at the time. They have stretched a little with wear – so I would say if you alternate sizes, just go with your larger; if you’re usually the same size, I’d call and ask how that pair runs.

    • Kelly says:

      I also wear my standard size in Ferragamos although I do think the “Carla” (my favorite shoe!) runs a little narrow, but a comfortable fits-like-a-glove narrow.

    • I find Cole Haans to be a bit narrow for me. While they are very comfortable for the foot, usually, I have to spend quite a bit of time “stretching” them out. Michael Kors shoes, I just find hideously uncomfortable. To this day, the only nearly new pair of shoes I have ever given away is MK.

      My feet are not quite wide enough for wide widths, but are on the wider side of average. I LOVE Ferragamo shoes. Hands down, the most comfortable heels I own. If I had the budget, I would limit most of my shoe purchases to this brand (branching out for style reasons only). I wear my standard 7.

    • I own several pairs of ferragamos and have wide feet. Look for D width.

  4. One thing that really bugs me about 401ks (or at least the one I have with Fidelity) is that you can’t just type in the amount you want withheld, you have to do a percentage. So it’s not actually possible for me to max out my 401k because percentages have to be in a whole number, and 10% is about $1,000 short and 11% is over $1,000 too high. Why can’t I just type in the number? Argh.

    On that note, what happens to the extra money if you do contribute too much? Does Fidelity stop the contributions before the end of year when it reaches the max?

    • Some of you math whizzes may have already figured out that my math is wrong . . .

      But you see my point. I miss the mark with either 10% or 11%.

    • LawyrChk says:

      Just do 11%. The provider will stop your contributions when you hit the annual contribution maximum. I arrange for a little extra withheld all year long, so when I max out at the beginning of December, my last paycheck that year has a “bonus” of no 401(k) withholding.

    • I sent my benefits dept a question about this once, also have a 401k through Fidelity. They said they would stop taking money out of my paycheck if I hit the max. You might check, too.

    • Tuesday says:

      Most payroll systems will automatically stop withholding when you reach your cap. ADP for sure does this.

    • karenpadi says:

      Do 11%. When you hit 16.5%, your accounting office should stop automatically putting money in your 401K.

      I set my 401k to hit the max in August or September. Then I have extra Holiday money and extra money to pay property taxes. It’s a nice year-end bonus.

    • Sutemi says:

      You should be able to change throughout the year. I tend to overweight early in the year, then readjust after bonus/raise period. Then when November and December roll around my takehome paycheck gets a bit larger which is nice for holiday expenses.
      If you do 11% for Jan-June and 10% for July-Dec you should hit almost the right amount.

    • I like the suggestion to front-load a little! My favorite month is when SS withholding stops -for the same “bonus” feeling :)

    • I agree with the others — let it max out and ‘they’ will stop the contributions.

      The only caveat is that if your employer does match, make sure you’re maximizing that as well. If they match up to a certain amount every pay period (e.g. 50% up to $200/month), you’d want to make sure you had it spread out over all twelve months, otherwise you’re missing out on free money.

      I don’t have matching, but my SO does, so he’s much more careful about making sure it’s spread out throughout the year whereas I’ve set it up to max out ~ 2/3 through the year. No real reason, other than I’d like to make sure I have as much as possible in there as soon as possible and my budget lets me do that. Plus there is the nice bonus of having a bigger check towards the end of the year!

      • Brilliant idea to front load, and important caveat about matching. I do have a very modest match from my employer (the only BigLaw I’ve heard of that matches; anyone else?), so I’ll look into that.

        You guys are the best!

        • MissJackson says:

          I front load, too. Between frontloading my 401k and the fact that I max out on SS taxes in late summer/early fall, I basically don’t have to budget for holiday spending — my paychecks automatically increase just when I need that extra money!

        • babyweight says:

          midlaw (400ish atty firm). we get 4% of salary into 401k. no match required. fully vested immediately. it’s the one perk i think is very good.

      • caveat on over-percentaging:
        if you switch jobs, and the employers don’t catch the overage (you go over $16,500 for the year, it is an administrative nightmare. employer 1 can’t repull the funds, you know owe tax on pre-tax money.. something like this happened to me potentially a few years ago. I forget the exact details but I think I caught the payroll people on the last paydate of the year and got it corrected just in time. So if you switch jobs mid-year, figure out in like October what your total will be- new employer may not have access to that so may not catch it properly. Also some companies can dump overage into your account post-tax.
        This whole system stinks.

  5. DC Jenny says:

    And make sure your 401(k) contributions aren’t just going to the default option (usually a money market)! So many people have no idea what’s happening with their retirement savings.

  6. Anonymous says:

    TJ – speaking of The Skirt, how would you style it for a casual, non-office day?

    • Saw a picture of a girl in a similar skirt in coral. She had on a black swing tank top (looked silk) with nude wedge sandles & fun jewelry. She looked fabulous!

  7. Alanna of Trebond says:

    So I’ll have a 401k for the first time this year when I start working–does it make sense to max out in this economy if my firm doesn’t have matching? Any other tips for someone just starting saving for retirement (and hoping to pay off student loans at the same time)?

    • Walnut says:

      Most 401k’s have horrible investment options. Check the plan’s investment options or fees. If you can do better on your own, then open a Roth IRA and either an IRA or just a regular old investment account.

    • karenpadi says:

      Yes, max it out if you make more than about 90k. If you make enough money to be able to max out your 401k while under 30, you are too “rich” to qualify for a lot of tax breaks like student loan interest even though you itemize (if you live in a high income tax state like NY or CA), and you are ineligible for the benefits of a Roth IRA. You are also too “poor” to have a house (mortgage interest deduction, property tax deduction) or deduct everything as a business expense.

      The 401k is basically the only tax-advantaged savings vehicle available to us (if you don’t have kids for a 529 plan). So use it.

      • Alanna of Trebond says:

        I am making standard BigLaw salary ($160k). However, my first three years I’ll never make that much, because I am working, clerking, then working again ($36,000 Y1), ($ 126,000 Y2 (half Biglaw, half clerkship)) and ($93,000 Y3+$50,000 bonus, but I am unclear how this gets paid out). Does this make a difference? Should I use a different investment vehicle or is the 401k best?

        • karenpadi says:

          I’m not an expert but here’s what I would do:

          Y1: you won’t have a lot of money and you’ll have a low tax rate. Use savings to create a $5k emergency fund first. Use any extra to fund a Roth IRA (I like Vanguard but you decide what’s right for you).

          Y2 and Y3: You are in the “hole” I described. Max out your 401k, if possible.

          • For my stub year I put $5K in my RothIRA, since I still qualified.

            Also, you can put it in up until April 15 of Y2 (or whatever day taxes are due), so it could, in theory, come out of your Y2 budget, rather than Y1′s.

    • Janie says:

      Check qualifications for a Roth against how much you’ll be making. If you qualify, definitely do that first.

      Get Suze Orman’s Money Book for the Young Fabulous and Broke from the library. Place a post-it to cover her scary scowl/smile. Then read :)

      • Roth First, Then 401(k) and Yes says:

        Yes, it makes sense to max it out in this economy. You will be able to buy 2x number of share of mutual fund A instead of x shares. And then when the economy improves and each share of the mutual fund is worth more, you will own more and your account will be worth more.

        In each year, first max your Roth IRA if you qualify. If you don’t qualify for a Roth IRA, max your 401(k).

        Someone other than I will have to tell you whether you can contribute to both a Roth IRA and a 401(k). If you can, do it.

    • The other side of that coin is that maxing out your 401(k) from the get go is a good way to save in that you’ll never miss that money if you never take it home… It can be harder to max out if you start out putting in $5k/year or $10k/year and then want to increase.

      Also, while I am a big proponent of paying off those student loans, if you have low interest rates, be careful not to focus so much on paying those off that you run up credit card debt or don’t save. You can always throw bonus money at them once you’ve built up some emergency savings, etc.

    • My best piece of advice is pick a few small things to splurge on and continue to live like a student, assuming you weren’t on either extreme of racking up a lot of consumer debt or living in abject poverty.

      Take your new salary (yay!) and start funding retirement savings and paying off student loans as aggressively as possible while building up a cushion of savings.

      I focused on paying of my loads ASAP because my interest rates were so much higher than any return on an investment I could get. I would imagine anyone graduating around now would be in a similar situation.

      • Alanna of Trebond says:

        My interest rates are not particularly low, 6% for subsidized and 8% otherwise. I don’t have any credit card debt.

    • Maybe I’m misreading your question, but I submit it makes the MOST sense to max out in this depressed economy, as theoretically the economy has much room to improve by the time you retire; i.e., the stocks your fund buys today with your dollars have much more room to grow by the time you retire.

      • Alanna of Trebond says:

        So my friend works at Goldman and the reason why she was hesitant about the 401k right now is that if it is pre-tax now, are the tax rates really going to be lower when we pull it out and pay taxes on it later? Or does it make more sense to invest in a different sort of stock or fund that has the money taxed now.

        • karenpadi says:

          When you pull it out, you’ll be retired and not making any other money besides SS. So your marginal rate will be lower.

    • Alanna of Trebond says:

      Thanks everyone for their answers so far!

  8. I don’t think it follows that switching 401K plans will save your employer money– unless you mean that individual members of management or HR will save money from the reduced fees in their own accounts. In my (limited) experience, it’s the plans with the highest expense ratios and assorted participation/management/wrap fees that are cheapest for the employer. Those plans just pass the administrative expenses on to employees. The employer then gets to advertise they have a great 401K plan without opening their wallet.

  9. karenpadi says:

    Ugh. This drives me crazy. I have a roll-over IRA with Vanguard and a 401k with Wells Fargo. I have them in the exact same Target-Date Funds. But my Vanguard account is going gang-busters and my Wells Fargo account manages to “lose” money even when the market goes up–all because of fees.

    This makes me so mad that I refinanced my house just to get the mortgage out of Wells Fargo’s grubby little hands.

    I wish 401ks weren’t tied to employer. I’m tempted to quit my job for a week and come back just to rollover my 401k balance into Vanguard.

    • I have a roth ira with charles schwab and it is tanking big time, meanwhile my federal govt tsp is going through the roof. I don’t understand. I’m contemplating moving my roth ira, but know nothing about doing that or if it’s allowed, etc.

      • karenpadi says:

        You can move a Roth at anytime. Vanguard has instructions on their website. It’s really pretty easy.

      • Understand that you need to distinguish between the investment vehicle (Roth, 401k, IRA, SEP, etc.) and how you have the money invested (ETFs, index funds, mutual funds, etc.).

        There’s actually no benefit to moving a Roth, unless fees are an issue. Roths are self-directed, so you should be able to control your investment allocations, and if you’re getting bad returns and don’t feel as though its systemic, you can move your allocation to another type of investment to get the returns you want (knowing, of course, that there are not that many fabulous investment options right now, particularly on the fixed income side).

        • This is a good point. I currently have my roth IRA in a lifecycle fund since I don’t feel that I know enough about investing to manage my funds myself. That is why I thought perhaps moving it to somewhere else would help. However, I do get your point. I think I need to spend a bit of time learning about the different investing options within the roth IRA.

  10. Anon for this says:

    “If your all-in fees are higher than 1.5%, lobby your employer to switch 401k providers–it will save them money and help you keep more of your nest egg.”

    Two thoughts from a currently anonymous 401k Relationship Manager:

    1. Small Companies with few employees in a start up company position will often pay fees well over 1%, mostly over 1.5% and sometimes over 2%. It is important to recognize the size of the plan and average account balance as a driver of your options. You can not unilaterally say that fees over X amount are bad without speaking to the specifics of that plan/employer situation.

    2. Switching companies accomplishes almost NOTHING. In today’s environment – mutual funds are no longer the commodity, everyone has access to the same funds. If you, as an employee block, are unhappy with your investment options expense ratios – petition the employer to move into a more beneficial share class and ask them to take on the cost instead of passing it back through to the employee

  11. anonamongus says:

    Here’s a question, I have a tendency to move around a lot in my field (always upwards and about every 2-3 years). I’m hoping to finally get settled in a mid-level position in the next year or two, but I always lose employer $, plus roll over fees etc. Should I open my own individual account and fund that? what is the best way to max my money?

    • karenpadi says:

      Rollover fees? I’ve never heard of those. I had an employer with a 3-year vesting period. I actually got the money after leaving the job (and over the next 3 years).

      Yes, open an IRA. Then, when you change jobs, just roll your 401k over to your IRA. The IRA is like a bucket that you can keep dumping old 401ks into.

      If I knew the best way to maximize my money, I wouldn’t be working. It’s guesswork (and why they invented target date funds).

      • I’d disagree on Target Date funds being the best option, particularly in a rising interest rate environment….by selecting a target date fund, you are double-layering active management into your portfolio, and ample research has shown that passive management is superior. But to each her own.

        Also, if you are experiencing significant differences in Lifecycle funds, note that it is likey due to the allocation b/w debt and equity. As the past few years of bad returns have happened, many target date fund managers have “upped” their equity allocations to try to generate outsized returns. And anyone our age (looked you up on the SAA website at some point) doesn’t need much fixed income allocation at all)…but that depends on your risk tolerance, of course. In a rising interest rate environment, nearly all fixed income funds will have negative returns or principal will be eaten due to the inverse relationship between p and i….

  12. I’ve seen a couple people on this site recommend Scary Suze’s Young Broke and Fabulous book – do others agree, or have alternative recommendations?

    I’m looking for some digestable information about being a grown-up with a real job…I have savings, a TSP from a former gov’t job, law school loans, and a 401K or something similar where my employer apparently has discretion to decide how much it wants to contribute each year. I haven’t had success finding a financial planner who gets a flat fee (as opposed to a percentage of my investments – I don’t have anything to invest). Ideas on where to start?

    • Away Game says:

      My aunt gave me Making the Most of Your Money by Jane Bryant Quinn when I finished grad school and got a “real” job. It does a pretty good job of laying out things to think about in the financial category at different stages of life, but especially when just starting out. The book covers different savings goals and vehicles, life insurance, retirement planning, mortgages, etc. I have the “old” book from 1997, and read it cover to cover, and still use it as a reference sometimes.

    • Amy H. says:

      I think Suze’s “Young, Fabulous and Broke” is decent. Beth Kobliner’s “Get A Financial Life” was even better.

      You can also check out blog posts on specific topics on “The Simple Dollar” and “Get Rich Slowly” for free. J.D. Roth of “Get Rich Slowly” also published a print book (“Your Money: The Missing Manual”) recently. I haven’t read it, but based on his blog I’d bet it’s good.

    • I’m late to this conversation but have to put in a plug for Suze. Her book did a great job of explaining a lot of those topics in clear, easy to discern language.

  13. Amy H. says:

    Oh, I also have the 1997 edition of Jane Bryant Quinn’s book, which is excellent — very thorough. I just checked and she issued an updated edition in 2009, so I’d highly recommend checking that out if you want more detail and depth beyond the Suze Orman and Beth Kobliner books (which are better ways to get started).

  14. Spot on with this write-up, I absolutely believe this amazing site needs much more attention.

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