Over 90% of Americans make this costly 401(k) mistake

|
Over 90% of Americans make this costly 401(k) mistake
Image Credit: Dreamstime.com
Team Clark is adamant that we will never write content influenced by or paid for by an advertiser. To support our work, we do make money from some links to companies and deals on our site. Learn more about our guarantee here.
Advertisement

Do you know how much money you’re paying in fees and other expenses associated with your investment accounts? If the answer is no, you’re not alone.

If you’re a fan of Clark.com, you may be familiar with our thoughts on 401(k) accounts — it’s a great way to make yourself save for retirement, especially if you choose automatic withdrawals from your paycheck and contribute enough each year to get the employer match. 

But your potential savings are significantly reduced if you make the same mistake that more than 90% of Americans make: ignoring how much you’re paying in fees! 

According to a study by NerdWallet, 92% of Americans have no clue what they’re paying in 401(k) fees.

That’s a big problem if you want to get the most out of your savings efforts. For the average person, these fees could mean the difference of thousands, and for some people, it could mean the difference of hundreds of thousands. 

Read more: Getting the most out of your 401(k)

Why you need to pay attention to fees

The average 401(k) plan’s fees equal roughly 1% of assets under management. Now 1% may not seem like a lot, but you have to remember that you’re not just forking over 1% (or more) of however much you’re contributing; you’re also giving up that same percentage of your savings as they grow.

An expense ratio is the annual fee investment funds charge. It is the overall cost of maintaining the fund, including management fees, administrative fees, operating fees and other costs. 

And while some 401(k) fees are unavoidable, you do have the power to limit the impact they have on your savings each year — which will save you a ton of money of over time.

In fact, according to Consumer Reports and Morningstar, fees are the best predictor of a fund’s performance: ‘Over the long haul, higher fees drag down a fund’s overall return.’

Read more: 5 costly retirement planning mistakes

The impact fees have on your investments over time

Vanguard has a tool on its website that shows you how expenses can erode your investments over time. 

For example, if you had a $10,000 investment, a return of 6% and an expense ratio of 1.02%, after 25 years, you would have kept $23,301 and spent $9,617.

Low cost brokerage house saves millions

But if you had a $10,000 investment, a return of 6% and an expense ratio of .20%, after 25 years, you would have kept $30,828 and spent $2,091 in fees. 

Low cost brokerage house saves millions

That means the difference between a .21% expense ratio and a 1.02% expense ratio would be $7,526! 

Can you imagine the difference when we’re talking $100,000 versus $10,000 invested? If we add another zero to the above equation, we’ll see that this can mean the difference of $75,260 in fees over 25 years of investing — fees that could have been avoided if they were invested in low-cost funds. This extra money could mean the difference of 2-5 years in retirement, depending on the financial needs of the retiree. 

Read more: How to invest your first $1,000 to $5,000 wisely

So, what is the recommended expense ratio?

Experts agree that an expense ratio under 1% is best — and lower if possible.

Wayne Zussman, a certified financial planner and president of Triton Wealth Management in Maryland says, ‘You want to be under 1% as your goal. I would even want to be lower.” 

“We advocate for employees that it stay under 1 percent. It can mean hundreds of thousands of dollars of difference for someone who is saving in a plan,’ advised Stuart Robertson, president of ShareBuilder Advisors. 

Avoid giving up as much as 40% of your returns by using a fee-only financial planner

According to Forbes, another big cost that can eat up your earnings is using an investment advisor to manage your investments. A way you can mitigate these costs is by choosing a fee-only financial planner.

By using a fee-only financial planner, you avoid being given advice that is not necessarily in your best interest, which may be the case with a commissioned salesperson, or a fee-based planner, who may also earn commissions on products they sell you. 

The best way to go is to use a planner who won’t profit by selling you something. This is how you’ll ensure the advice they give is in your best interest only — not because they will be earning a commission on what they recommend to you. 

Read more: How to find a fee-only financial planner

Tips to make the most of your retirement savings and investments right now:

To jump start your investing journey, check out Clark’s investment guide here

Advertisement
Author placeholder image About the author:
  • Show Comments Hide Comments