Doing This With Your 401(k) Could Cost You $18,000

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Workplace 401(k) plans play a major role in helping Americans prepare for retirement, with around one-fifth of all retirement assets held in 401(k) accounts as of 2022.

There's good reason so many Americans turn to 401(k)s to save for their future, including the convenience of contributing to a workplace plan, the potential to earn a company match, and the tax breaks that 401(k) plans offer.

Unfortunately, because 401(k) plans are tied to employment, there is also a significant potential risk many Americans are unaware of — and it could cost them if they don't take steps to avoid the damage.

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Americans risk losing thousands in 401(k) funds if they don't act

New research from PensionBee revealed the potential problem 401(k) holders are facing. The issue arises from the fact that most Americans no longer stay at one company for their entire career, but instead change jobs often — and this can result in new fees on their 401(k) plans.

As PensionBee explained, companies often cover retirement plan fees for workers while they are employed, but stop paying those fees when they stop working. PensionBee likened this to situations when employees remain on company health plans under COBRA but their employers stop paying premiums.

However, while employees receive clear notification about added health costs they'll owe under COBRA, the 401(k) fee changes happen with "minimal transparency" and continue for the duration of the time the employee has the account open — often without workers knowing they're now being charged new costs to maintain the 401(k) account.

Providers managing 401(k)s can also force out employees with low plan balances, issuing employees checks for accounts under $1,000 or transferring accounts with between $1,000 and $5,000 into an IRA with the participant's name on it. Unfortunately, this could lead to early withdrawal penalties or added fees, depending on the IRA chosen.

How much could this cost you?

PensionBee examined the financial consequences of the added fees that can occur when a 401(k) is left behind, and the numbers are startling.

A typical employee who works for 33 years, changes jobs every three years, and earns a 5% investment return stands to lose $17,905 in fees over their career if they are charged just $4.55 per month in 401(k) account maintenance fees with each job switch. Those who earn higher returns or who pay higher fees could face even larger losses.

That $4.55 monthly fee may not seem like much — it's about the price of a good cup of coffee — but it can diminish your 401(k) balances over time.

The table below shows the lifetime costs of these fees for a typical employee over a 33-year period.

A table showing compound losses to 401(k) accounts left at 12 jobs over a 33-year period.

The effects of a small fee are outsized because every account that incurs a fee reduces the principal balance, causing the accountholder to lose not just the money taken out, but also the compound growth they would have earned on the funds lost to fees.

Unfortunately, many Americans are unaware that they're losing this money. A study from the Government Accountability Office revealed that 41% of 401(k) account holders are unaware that they pay any 401(k) fees at all. And 40% don't fully understand the expenses associated with their workplace retirement plans.

How to protect your retirement security

The good news is, you don't have to lose thousands to 401(k) fees when you make a career change.

You have other options for your retirement plan, including rolling over your old 401(k) to your new employer's plan, or rolling the funds into an IRA of your choosing when you change jobs. Rolling over your funds can also help you to avoid forgetting about your account, which a surprising number of Americans do.

You should also pay careful attention to the fees you're paying in any 401(k) plan you are participating in, whether the plan is held by a current or former employer. This includes:

Plan administration fees
Investment fees
Individual service fees
Sales fees (commissions for buying and selling assets)
Management fees or investment/advisory fees
Other fees for recordkeeping, providing statements, or investment advice

Your 401(k)'s summary plan description (SPD) and annual report should include information about the charges you have to pay each year. With the Department of Labor warning that even a 1% difference in fees can reduce your balance by close to 30% over your career, you can't afford to ignore this issue.

When you find yourself with added 401(k) charges after leaving a job, take action quickly — and, when it comes to your current plan, if it has high fees, consider contributing only enough to earn your full employer match before shifting additional funds earmarked for retirement to an IRA. You'll have more choices for brokerage firms and investment options and can better control your costs if you take this approach.

You work too hard for your money to lose it to fees — so do the research you need, especially when changing jobs. If you make sure you understand how your account expenses will change, you won't put your retirement security at risk while making financial firms richer.

Christy Bieber is an experienced personal finance and legal writer who has been writing since 2008. She has been published by Forbes, CNN, WSJ Buyside, Motley Fool, and many other online sites. She has a JD from UCLA and a degree in English, Media, and Communications from the University of Rochester.