Stop Paying the Hidden Fees in Your 401(k)
Your 401(k) may be bleeding internally. Learn how to rescue your retirement portfolio from unnecessary costs.
Quit worrying about the recent volatility in the global capital markets. Your retirement portfolio may have a bigger problem. Yes, I know, we have been in a global bear market for stocks. The headlines are full of warnings, and retirement investors are nervous. I get that. I see it everyday in eyes of the retirement investors.
But believe me, the recent stock market gyrations are most likely the least of your retirement portfolio's problems. Your 401(k) portfolio may be bleeding cash internally, and you may not even know it.
401(k) Anatomy 101
To grasp what I mean by internal bleeding within your 401(k) portfolio, you must first understand how 401(k) plans are constructed. In general, 401(k) plans have two basic operational components: investment options and recordkeeping or administration.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Each component has a distinct and important role to play in order to keep your 401(k) plan humming along. And it stands to reason that each component of your 401(k) plan should have a separate and distinct fee commensurate with the type of service being offered, right? Wrong.
Hidden in Plain Sight
Hidden fees in 401(k) plans have been written about extensively over the past few years. And numerous lawsuits have been filed against 401(k) plan sponsors over excessive fees within their plans. In 2012, the Department of Labor issued rules mandating the disclosure of all fees to 401(k) plan participants. However, the lawsuits and new disclosure rules have done very little to prevent the hidden fee practice known as revenue sharing.
Revenue sharing is basically legal kickbacks from mutual fund companies to retirement plan record keepers. Under most revenue sharing arrangements, mutual fund companies pay a percentage of the fund's expense ratio to retirement plan record keepers to cover administrative expenses. The problem is, if you have mutual funds in your 401(k) that pay revenue sharing, you are effectively paying an asset-based fee for your plan's recordkeeping and administration. And as 401(k)s go, it's never a good idea to pay an asset-based fee for non-investment management services.
You see, under a revenue sharing scheme, every time you make a contribution to your plan, the cost of sending out your quarterly statements goes up. That is akin to hiring a plumber to fix a leaky gasket, but paying him based on the amount of water that flows through the pipe. No one would think that's a good deal, except for the plumber!
A Silent Killer of Retirement Portfolios
The damage inflicted by revenue sharing on your retirement portfolio can be extensive over time. The more you invest, the more revenue sharing eats away at your savings. The amount of revenue sharing paid varies by mutual fund, but can be as high as 0.40% per year or more. And because revenue sharing is built in to the mutual fund's daily net asset value (NAV), you don't see it or feel it. It's insidious.
Here's an illustration: Let's say you have been a diligent saver and have a 401(k) balance of $250,000. If the funds you invested in kicked back revenue sharing in the amount of 0.40% per year, you're paying approximately $1,000 per year ($250,000 multiplied by 0.40%) for administrative services that should cost no more than about $100 per year. Additionally, it is likely that you are actually subsidizing your fellow employees with smaller balances in your company's 401(k) plan. Gee, did you even get a thank you note?
How to Stop the Bleeding
The good news is your 401(k)'s condition does not have to be terminal. There are potentially two things you can do right now to stop the hemorrhaging and keep more of your 401(k) balance from being siphoned away:
1. Use index funds.
Most index funds do not share revenue. But be careful, there are indeed expensive versions of index funds. If the S&P 500 index fund in your plan has an expense ratio of more than 0.05%, you're getting ripped off. Also, most 401(k) plans do not offer an extensive lineup of index funds needed to build a well-diversified portfolio.
2. Use a brokerage window.
If your plan offers a brokerage window, which is the ability to trade offerings of a brokerage house such as TD Ameritrade, Schwab or Fidelity through your 401(k), you likely have access to virtually unlimited investment options including low-cost, exchange traded funds (ETFs). And your 401(k) plan's brokerage window may even offer dozens of ETFs that can be bought with no trading commissions, depending on the sponsor. (We use a number of commission-free ETFs to build individual 401(k) portfolios via a brokerage window for our clients. We absolutely love them.)
You don't have to be a math whiz to see that over time, the compounding effect of asset-based revenue sharing can unnecessarily put your retirement portfolio in critical condition. If you have a 401(k) balance of $50,000 or more, act now before more of your hard-earned money bleeds out.
Ron is the founder and CEO of ONE Retirement, an independent advisory firm focused on managing clients' retirement assets.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Ron is the founder of ONE Retirement, a registered investment advisory firm based in Overland Park, Kansas managing over $150 million for retirement investors. Ron's experience in the investment management industry—over a quarter century—instills him with a drive to help people attain and sustain their dreams for retirement. He started ONE to provide high-quality and highly personalized retirement and financial planning services to businesses, individuals, and families across the country.
-
5 Tips for Investing in the Trump Presidency
With Trump back in office, expectations are high the bull market will continue. Here's how investors can prepare.
By Karee Venema Published
-
Where to Retire: Living in Portugal as a US Retiree
Living in Portugal as a retirement landing spot has abundant advantages, but do your homework and due diligence first.
By Brian O'Connell Published
-
A Social Security Storm Is Gathering: Here's Your Safety Plan
If Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
By Brian Gray Published
-
How to Avoid These 10 Retirement Planning Mistakes
Many retirement planning mistakes are easily avoidable. Here are 10 to have on your radar so you don't end up running out of money in your golden years.
By Romi Savova Published
-
Before the Next Time Markets Sink, Do Your Lifeboat Drills
An eventual market crash is inevitable. We can't predict when, but preparing for the ups and downs of investing is imperative. Here's what to do.
By Andrew Rosen, CFP®, CEP Published
-
This Late-in-Life Roth Conversion Opportunity Spares Your Heirs
Expensive medical care in the later stages of life is an unpleasant reality for many, but it can open a window for a Roth conversion that benefits your heirs.
By Evan T. Beach, CFP®, AWMA® Published
-
Women, What Is Your Net Worth?
Many women have no idea what their net worth is, or even how to calculate it. Many also turn to social media finfluencers for advice. Here's what to do instead.
By Neale Godfrey, Financial Literacy Expert Published
-
Converting Retirement Savings to a Roth IRA? Don't Do This
You might want to convert all of your savings to a Roth in one go, but you could end up paying hundreds of thousands more in taxes than you have to.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
What Is Your 'Enough Is Enough' Number for Retirement?
Chasing a 'magic number' for retirement can be anxiety-inducing. Instead, build your plans around a personal number that reflects your individual circumstances.
By Scott M. Dougan, RFC, Investment Adviser Published
-
Asset Protection for Affluent Retirees in 2025
Putting together a team of advisers to assist with insurance, taxes and other financial issues can help with security, growth and peace of mind.
By Derek A. Miser, Investment Adviser Published