Why Is It Important to Know about 401(k) Fees?
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Why Is It Important to Know about 401(k) Fees?
Do you know what fees you are paying for your 401(k) plan? Most people are probably only dimly aware that there are fees. Even fewer know how much is coming out of their accounts each year to pay them. Fees are used to compensate those who provide important services that keep your account running.
Things To Know
- Take fees into account because they will affect your balance.
- Weigh what you are getting with what you are paying.
Fees will impact your account balance, which you may come to depend on in your retirement years. If you are using general projections that take hypothetical earnings rates, employer matches, age, tax brackets, and other factors into account, you will arrive at retirement estimates that look rosier than they really are. That is why it is a good idea to adjust the earnings rate as needed to reflect fees; calculators don’t typically include space for them. That also means you should know which fees are being charged to you, and how much.
Example
Consider a simplified scenario: a hypothetical employee who is 35, earns $40,000 a year, and has made the brave decision to retire at 70 instead of 65. This person has $25,000 in her 401(k) plan. She defers 5% of her income into the plan each year, with an employer match of 3% and an annual salary increase of 2%. With an average return of, say, 7%, she can expect to have $649,000 in her account by the time she’s 70. Not bad. But if her various fees and other expenses are 1% and are coming out of her account balance in some way, she can expect only $502,000. Still not bad, but her estimated earnings have dropped 23%. And that can cost her if she expects to live a long time after retiring.
This example is simplified, of course. Investment returns are never guaranteed, nor can they be predicted with full accuracy. This example’s purpose is to show what even small fees can do to the money you are counting on to be there when you are old and gray.
The number of services available to 401(k) plan participants has increased a lot in the past few years. These services come with expenses, which are passed on to you; with convenience come costs. Both employers and employees should weigh what they are getting with what they are paying.