How to Know If Your 401 (K) Commission Is Too High
While stock market downturns often get the most attention from those concerned about their retirement funds, there is one more thing that could be hitting your savings: 401 (k) fees. While retirement plans need to be transparent about the fees they levy by law, most of those who contribute through their employers are still in the dark. According to a 2018 TDAmeritrade survey , only 27% of 401 (k) employees know how much they pay for a bounty, and here’s why it’s important: 401 (k) fees can be in the tens of thousands of dollars in a lifetime. …
Alex Wilson , a certified financial planner based in Atlanta, recommends starting by comparing your 401 (k) fees to those of other plans – and the cost of your IRA plan options. If you’re unsure of where to start, BrightScope offers a chart with indicative commissions by plan size.
“In addition to planning management fees, you should check the fees for the investment itself,” suggests Wilson. These commissions, often called expense ratios, represent the recurring cost of owning an investment. The expense ratio is the percentage of how much you have invested. For example, if you have $ 1,000 in a fund with an expense ratio of 0.25%, you will be charged $ 2.50 per year.
Wilson advises carefully evaluating actively managed funds – which have a fund manager or a management team trying to outperform the stock market – with an expense ratio above 0.5%, although she adds that an expense ratio of up to 1% may be acceptable if the fund has performed particularly well. well. For passive funds that track a market index, such as the S&P 500, expense ratios should not exceed 0.2%.
Not sure where to find your 401 (k) fees? There are several tools to make this process easier. The simplest option is a free FSA funds analyzer . You can also try free tools from TDAmeritrade and FeeX or Personal Capital, but these companies may recommend proprietary services or products.
If you don’t like what you are discovering, you may be able to do something about it. Start by looking at your investment options to see if cheaper funds are available. If not, talk to your 401 (k) plan administrator or your company’s HR department and ask the company to shop for cheaper investment options. Even if your 401 (k) commissions are high, you still have to deposit enough to be fully compliant with the company. After that, you may want to consider saving elsewhere, such as a traditional IRA (before tax) or a Roth IRA (after tax). You can keep your savings rate at the same level by setting up automatic contributions, as long as you don’t exceed the annual limit, which is only $ 6,000 in 2020 for people under 50.