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retirement fees

The cost of retirement is steep. A retirement calculator can give you a more exact estimate of how much you’ll personally need to save to be able to retire, but, on average, a person needs to have $1.5 million saved to live comfortably in retirement. As you push through contributing to your 401(k) plan each month, costly fees could be setting you back – and you might not even know you’re paying them.

Find out now: How much do I need to save for retirement?

What Are These Fees?

If you don’t know what fees you might be paying you’re not alone. Studies show that six out of 10 people don’t know how much they’re putting into their 401(k)s, or what fees they’re being charged.

Making the fees that much more elusive is the fact that it’s usually not just one fee that you’re paying, but a combination of fees that can add up to a larger percentage than you may realize. These are the main categories of fees you may be paying:

  • Administrative fees: Also known as account maintenance charges, these fees cover the costs of managing your account. This is typically taken out of your account’s overall return.
  • Investment fees: This category is by far the biggest offender for draining your retirement account. Investment fees, also referred to as management fees, stem from expenses associated with managing investments. These fees are typically a percentage of the assets invested, and they are usually taken directly out of investment returns.
  • Individual service fees: These fees are charged on top of administrative fees if you’ve opted in to optional plan features. Individual service fees are typically charged separately to your account.

How Much Are These Fees Really Costing You?

retirement feesTypical 401(k) fees add up to about 1% a year. This might not seem like much on a month-to-month basis, or even at a yearly glance. But over a 10-year period, these fees can really add up. A 2014 study by the liberal think-tank Center for American Progress found that the average American worker would have to work an additional three years to compensate for fees.

Let’s say, conservatively, you’re getting just over a 5% return on your investments. With all of the fees added up, you may be paying more than 2% in fees against that return.

So in one year, let’s say you earned around $2,900 gross return on your money. With all of those fees, you could be losing out on more than $600. So instead of banking $2,900 in a year, you’ve only stashed away $2,300, putting your $1.5 million benchmark that much further from reach.

Over 40 years of saving, that would translate to $24,000 lost to fees – and that’s before compound interest. Because the fees charged are a percentage of the portfolio value, the larger the your portfolio grows the more money you’ll be losing to fees. The account value lost to fees will only continue to accelerate over time. Fees could easily erase tens of thousands of dollars from your retirement savings.

How Can You Minimize These Fees?

For the traditional 401(k), there may not be a solution right now for avoiding these hefty fees. The best defense is knowledge. Educate yourself on what fees are associated with your particular account, and figure out how to minimize those costs.

Also talk to you employer. Check that the fees associated with your company’s plans or at or below average. Some experts recommend negotiating how much of these fees you pay. Most workers pay these fees out of their own pocket, but about one in four employers do foot the bill on company-sponsored plans.

Otherwise, you might consider looking to separate, outside investments to augment your 401(k). Index funds and index-based ETFs don’t require active management, so that could cut down on investment fees. While actively managed funds typically have fees around 1%, fees for index funds are typically around 0.25%.

The Bottom Line

retirement fees
Saving enough money for retirement is hard enough without fees taking a chunk out of your savings. The first step – which you’ve accomplished by reading this article – is awareness. Now that you know about these sneaky fees, make sure you’re taking steps to minimize their effect. A 1% fee might not seem like much at first glance, but over time it really adds up.

Tips for Minimizing 401(k) Fees

  • Consider index funds and index-based ETFs. Unlike mutual funds, index funds don’t require active management. Opting for these less costly to run options can cut back on investment fees.
  • Talk to you employer. Some experts suggest negotiating with your employer on the percentage of fees that you pay. Encourage your employer to steer clear of high-fee plans.
  • Regularly audit your portfolio. Stay on top on what’s up with your 401(k) so you can always be aware of all the fees – even the hidden ones.

Photo credits: ©iStock.com/gradyreese, ©iStock.com/Zerbor, ©iStock.com/shapecharge

Tierna Unruh-Enos Tierna Unruh-Enos holds an MA in Journalism from Prescott College in Prescott, AZ. She is a an expert in careers, budgeting and saving money. A native of New Mexico, Tierna is a communications and marketing specialist in Albuquerque. She is also a mother, a freelance writer and lover of all things green chile (there may be a few exceptions!).
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