Daily Capital

401k Fees: How to Analyze and Optimize Your 401k

With traditional pensions fading away, the importance of 401k plans has grown significantly. For most workers, other than Social Security, whatever has accumulated over an individual’s career in their 401k will likely represent the bulk of their retirement savings. This is why it’s important to analyze your retirement by looking for hidden fees to optimize it.

Analyze your investments for fees

When analyzing your investment portfolio(s) for fees, think about the following:

Want a clear view of your retirement?

Huge spread in expense ratios

The cheapest expense ratio in many 401k plans will come from an Equity Index Fund and be somewhere near 0.01% at its lowest. In contrast, actively managed Equity Funds expenses can exceed 1.0%. Actively managed equity funds are much more expensive because they pay the fund manager and analysts for trying to outperform a benchmark, like the S&P 500 index. If the fund manager(s) can indeed outperform the S&P 500 index by more than 0.5%-1.0% a year, then their fee is on par with the cheapest index Fund. If not, you are wasting my money. Overall, active fund management cannot outperform passive fund management over the long run. that active fund management cannot outperform passive fund management over the long run.

Fees add up over time

In 20 years, a portfolio with an average of $1,748.34 a year would pay close to $87,000 in mutual fund fees. I don’t know about you, but that seems like a lot, even if that 401k does grow to over $1,500,000 as estimated in the 401k By Age post. It is extremely important to understand the impact of fees in your account and which fees are most expensive. Long term growth has a way of compounding into great returns for consistent investors and savers. But the opposite can be true if fees go unchecked.

Understanding tax cost ratio

Additional layers of fees

The tricky thing about 401ks is that you have to pay additional fees over and above expense ratios, which varies based on which plan your employer set up. According to a study by the Government Office of Accountability, other fees can include marketing and distribution fees (12b-1 fees), sub-transfer agent fees, trading or transaction costs, wrap fees, trustee fees, legal fees and audit fees. Pretty amazing right? The bottom line is that there can be fees on top of expense ratios that can add up, especially for small companies.

Focus on ETFs or index funds

When you run an index fund, there’s no team of analysts to pay.The index is rebalanced usually once a quarter, or whenever there is a big index addition or subtraction to reduce variance risk. Consider low cost index funds, ETFs, or Smart Indexing with Personal Capital where we build a custom portfolio that is constantly rebalanced.

How to use fee analyzer to spot hidden fees

You could be losing hundreds of thousands of dollars in hidden fees in your mutual fund, investment, and retirement accounts. Financial institutions charge annual fees on mutual funds and other assets. Over time, these fees add up and can dramatically reduce your lifetime savings.

Below is the chart from Personal Capital’s 401k Fee Analyzer tool. Let’s say you continued to contribute $17,000 pre-tax to your 401K per year from a couple years ago when the limit was lower, and continued to receive a full employer match every year, with a return of 5.85% a year for 30 years. According to our tool, you would have paid $489,014 in fees and lost out on at least two years worth of retirement income.

Step by step instructions on how to minimize 401K fees

It’s easy to start. Here’s how.

Step 1
Sign up with Personal Capital and link your 401k account by clicking the “+” button on the top left and search for your 401k provider.

Step 2
After your 401k account is linked, click the “Planning” tab on the top right then choose “Retirement Fee Analyzer.”

Step 3
Play around with the contribution, employer match, growth, and additional fee assumptions to develop a pro-forma analysis of your retirement account.

Step 4
Research alternative ETF or index fund substitutes for your high-cost, actively managed mutual funds.

Step 5
Link other portfolio accounts that you’d like to analyze. The Fee Analyzer can analyze several different types of investment portfolios.

Get real insight into the performance and expense ratios of thousands of the most popular mutual funds. Learn how much Wall Street could be making off your mutual fund investments and uncover taxes you didn’t know you were paying with the Personal Capital Fee Analyzer.

A few additional tips

Check Your Investments

Perhaps you only review your retirement accounts once a year; maybe you assess your progress even less often.

If so, you’re missing opportunities to course correct. Things can change quickly and checking regularly allows you to periodically rebalance your portfolio. This practice can help you ensure you have the appropriate asset allocation for your risk tolerance and time horizon.

Getting Trusted Guidance

Whether you’re looking to hire an investment professional for the first time, or if you’re looking at alternatives to a current advisor, getting the conflict-free information you need to make smart decisions about managing your wealth is critical. Personal Capital advisors always act as fiduciaries, which means they are legally bound to act in your best interests.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Jesse Piburn
Jesse has been working in financial services since 2012, beginning his career as a Financial Consultant with AXA Advisors in Denver, CO. While at AXA Jesse services a client base of individuals, families, and small businesses helping them to develop personalized strategies to meet their financial goals.
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