Are you depositing money each paycheck to your 401(k) account? Up to the match or even beyond that? Each year, I deposit as much as I can, because even after the match, my plan’s S&P fund charges .05%. Let me spell that out, on $100,000, 1% would be $1000, .05% is $50. The account itself also has an $80 per year fee, so on that same $100,000, the total cost is about .13%. My balance is higher than this, so my cost is lower as an overall percentage.
Recently, I became aware of the 12th edition of the 401(k) averages book. I hate when someone ruins a book or movie’s ending for me. Soylent Green? It’s people. Sorry about that. In this case, I suspect you’re not planning to order the book (for $95) so I’ll not worry too much about ruining the ending. 1.08%. That’s the total cost for the average large retirement plan, over 1000 participants. For a smaller plan, the average costs rise to 1.24%.
Ideally, your 401(k) helps you to take pretax money, otherwise taxed at say, 25%, and delay the withdrawal until retirement, when you plan to be in a lower bracket, 15%, or so you’d hope. You see what’s happening here? Your goal is to save about 10%, a bit more with the effect of the tax-deferred compounding. It doesn’t take long for a 1% or higher fee to negate this savings completely. Say you are about to receive $1333 in pay. You have two choices, to deposit it pretax in the 401(k) or to pay $333 in tax, netting $1000 and invest that in a Roth IRA. After 20 years of growth at say, 8%, the $1333 grows to $6213 in the 401(k), but a 1% fee reduces this to 7%, returning $5158. Ouch. After 15% tax, you have $4385. In the Roth account, the $1000 grows to $4661.
The 1% is just an example, actual fees run as high as over 2%, a cost I consider criminal. Little wonder that Broker-dealers up in arms 401(k) fee disclosure. You see, there’s a new rule scheduled to take place on April 1, 2012. It requires disclosure of the fees within all 401(k) accounts. Only, this April, the joke will be on us, as the average 401(k) account charges such high fees that most participants should stop depositing after the match, and a good number of plan providers in the 1.5% and above should probably be sued for not offering reasonable investment choices.
Most advisors agree that 4% is the amount you can comfortably withdraw each year from your retirement account. When the fees are 1% per year, there’s 3% for you and 1% for the fat cat on Wall Street who sold this plan to your employer. Me, I’d rather switch than get knocked out, unlike the guy in this classic cigarette ad.