You probably pay fees to invest in your retirement plan at work,
but you might not know how much you pay or even how you
pay those fees, and this is important because any costs are going to reduce
the amount you have left over for spending. So we're going to talk
about what those costs are, and we'll go over a couple of tips
on how you can reduce the amount you ultimately pay. We'll start with
investment expenses, and these are the fees in the underlying investments
that you pick in your plan. So that might be a mutual fund
or an ETF that the money goes into. Those have annual investment expenses
and different options have different expenses. Typically, your passive options
like an index fund are going to have the lowest expenses,
but other options like actively managed funds and even overseas investments
might have higher expenses, so you have some control over this,
which we'll get to in a second, but you also want to keep
the big picture in mind and have a diversified portfolio that matches your
needs. There are also recordkeeper fees. So the record keeper might be the
company that offers the website or the vendor that your employer uses for
the 401k. So whenever you get statements or you log in to make
changes to your account, that's probably with the recordkeeper and they
charge fees. In some cases, that cost is going to be a percentage
of your account balance that comes at each year, and you might see
that transparently or it might not be so easy to find,
it can also be a flat fee that comes out every month or
every quarter. Administrative fees might be part of the record keepers fees
or they might be separated if you have a third party administrator,
but these costs are going to cover services like reporting on the plan
each year to the IRS and getting the legal document, doing some non
discrimination testing to review how the plan performed over time. Processing
distribution requests, and a number of other things that happen behind the
scenes. In some cases, your employer pays administrative costs for you,
which is always nice. Then there are consultant fees, and that might be
for a financial advisor or some other type of consultant who is helping
on the plan, that might be charged as a percentage of the assets
in the plan, or it might be a flat fee, again,
it just depends. If you are paying fees to a financial advisor,
be sure to take advantage of that service and ask them questions about
retirement: Get some guidance on which investments might be appropriate
and how much you need to save, and that way you're getting the
most out of your money. Some plans also charge transaction fees,
and these are kind of rare, but it just depends. If you take
a loan for example, you might have to pay an upfront fee for
getting the loan and then an annual fee for servicing that loan or
keeping track of the loan payments, you might also pay transaction fees
if you do short term redemptions from certain fund options, for example,
it just depends again, on the record keeper that your employer uses and
what their rules are. Another potential fee is an advisory fee,
so if your plan offers a managed account option or something like that,
there are typically additional fees on top of the fees for the underlying
investments that you might choose. Now, this is a good time for a
friendly reminder: You certainly want to check with your employer and get
some additional information, this is just a start to help you understand
what types of fees you might be paying, and by the way,
if you want some free retirement planning resources, you can check the description
below. So how exactly do you pay fees? In many cases,
you don't see it, although things are certainly improving and your employer
should provide a fee disclosure or the vendor should provide a fee disclosure
that tells you exactly how much you pay. In some cases,
it's done through revenue sharing, so there might be a fee that goes
into the investments you use, or again to the record keeper,
and out of those fees, they take some money and they split it
up. And some of that might go to a consultant or financial advisor,
some of it might go towards the administration, it can be really difficult
to tell exactly what's going on unless you look very carefully,
in other cases, you have line item transactions and those to show you
exactly what you're paying, and that's always helpful because then you know
what's going on. When it comes to managing costs, you might have some
control, although you don't have total control, and that's because the decisions
that your employer makes and the vendors they choose are going to influence
the fees in the plan. And the size of the employer and other
factors can also affect the fees, but if you're concerned about fees,
it's a good idea to speak with your employer and just let them
know that you are watching and that you want to make sure that
they're doing a good job. Employers have a legal duty to their employees
to make sure that the plan is paying reasonable fees. That doesn't mean
that the plan has to pay the lowest possible fees, but they do
need to be reasonable and the employer needs to pay attention and not
be asleep at the wheel. You can also choose lower cost investments in
some cases, so if your plan has index funds and actively managed funds,
and either one of those will accomplish what you're trying to accomplish,
then you might save some money by going with the passive option.
It's important to keep a big picture view though, because if you just
pick the investments that always have the lowest expenses, you might not
have a diversified portfolio, you might not have the right risk level for
your needs, so be sure to keep that big picture in mind.
If your plan offers in service distributions and it has high fees and
you qualify to take some money out, you could potentially move that money
into an IRA or an individual retirement account that you manage,
and then you can choose the investments in that and select lower cost
options, and if you really don't have any other options, you can just
save as much as it takes to get the match from your employer
or whatever you need to do to accomplish certain things on your taxes,
and then save any additional money elsewhere, whether that's an individual
retirement accounts, your HSA, taxable accounts, etcetera. But again, keep
the big picture in mind as you do that. It's important to remember
that if you save nothing because you don't like the fees,
you're going to end up with nothing saved, and that's not good for
you. So do what's best for you. And do the best you can
until you have the opportunity to change something. I hope this is helpful.
If you liked it, please leave a quick thumbs up. Thanks and take
care.