Saving more for tomorrow by paying less in 401(k) fees today is the aim. – DoL

Your retirement income depends on several factors such as the amount of money you saved, your time horizon, returns you earned on your investment and the expenses of your retirement plan. To get the maximum out of your plan you should always aim at minimizing the cost and maximizing the returns.

In our last post, we discussed how the fees that you pay for your 401(k) plan determines the size of your retirement nest egg. The new rule of 401(k) fee disclosure gives you an opportunity to look at your plan fees and to initiate some action from your side to boost your investment returns. As a participant you can not change the plan provider but still you can do whatever is within your control to enhance your returns.

Here are the few things that you can do to minimize the cost:

Read, calculate and compare

“Torture numbers, and they’ll confess to anything” Gregg Easterbrook

The first step is to read the report carefully and make some time to understand it. The fee statement as of now is lengthy, confusing and glaringly incomplete. It shows the expense ratio of each investment option of your 401(k) plan – expressed as both a percentage of the account balance and the dollar cost for each $1,000 invested. You need to do calculations yourself to find out the exact amount you are paying. So go through it carefully and do your math. Pay some attention to what you are paying for your plan and see if it is worth it.

Compare the fees of your plan with the average fees of plans offered by other employers. You can do such comparison at Brightscope.com. Discuss these things with your friends and colleagues and though it is difficult, make sure to compare apples to apples.

Minimize the cost (Switch to lower cost investments)

After ascertaining the exact amount of fees you are paying, think of redesigning your plan so as the costs can be minimized. One way to do this is to get rid of expensive investments and switch over to the investment options with lower costs which fits your retirement plan. Index funds generally have lower expense ratios as they simply track the benchmark such as S&P 500. On the other hand, active investments, have fees which may be more than 1%. Unless your portfolio manager is exceptionally good at his job and is able to outperform the market, there is no point in choosing these active investments. Cutting even the small expenses may bring big returns over the long run and therefore, these expenses matter a lot when choosing an investment option.

That said, low cost should not be the only criteria for selecting an investment option. Keep in mind your risk tolerance, investment strategy and retirement goal while choosing an investment.

Boost your earnings

An investment option that charges higher fees may not necessarily bring you good returns. Choose an investment after weighing the cost and benefit. Expenses take a bite of your portfolio every year and studies in this regard clearly show how higher expenses hurt the fund returns. To get the best out of your plan you should aim at maximizing the returns and at the same time minimizing the costs. You may not have much control over the investment returns, but costs are one thing that you can control and reducing the fees will definitely boost your earnings in the long run.

While investing for your retirement, “time and low costs are your friends; high expenses and taxes are your enemies.”

Get the services

Its your employer’s responsibility to educate and assist the plan participants. Therefore. in addition to the fees you are paying, the fees report will also give you the information about the services available to the participants for the fees. Make use of this information and get the services for which you are paying. Such services may include personal consultation with your fund manager, one on one discussion about your specific needs and retirement goals etc.. Getting these services will enable you to take active participation in your 401(k) plan and make you a conscious individual in saving and investing for your retirement.

Ask for better options

After learning about plan fees, if you find the fees is unreasonably too high then you can politely ask your HR department to reconsider the plan menu. In this time of low job security, its not advisable to become a complainer in your company; so gently persuade your HR manager to look for better options. Making some collective effort is good and therefore go to your HR department with the colleagues who have similar request.
Remember while demanding for a better option.

There is always strength in numbers. The more individuals or organizations that you can rally to your cause, the better – Mark Shields

Nevertheless, keep in mind that, 401(k) plan is a group plan and therefore its not possible for your employer to accommodate each and every one of his employees’ individual requirement.

Brokerage window

If you are not happy with the options available in your plan then you can make use of brokerage window (if your plan provides that option) to buy low cost exchange traded funds (ETFs), mutual funds or individual stocks, provided your plan offers this.  Also known as a self-directed plan, it lets you to go beyond the menu offered in the plan and allows you to choose any listed stocks, mutual funds or ETFs. This is a good option only if you are good at individual stock picking and have the knowledge of underlying risk. Consider all the pros and cons before taking this option.

Bottom line

Low income and high inflation have made it difficult to save for retirement; volatile market and lack of basic knowledge about finance industry may deter you from participating and taking advantage of DIY 401(k) plans. High fees may further discourage you from saving more. But keep in mind that you need to save money to live when you no longer work. Social security benefits are enough to fulfill only 40% of your need and for the remaining part you have to make up yourself.

It is everybody’s dream to retire with a big nest egg. You are saving a part of your present income with this in mind. Your 401(k) fund is probably one of your biggest source of income during your golden years. Therefore, identify the hidden costs and try your best to avoid it. While saving for your retirement, every dollar counts and you should aim at reducing the cost if it is within your control.

As long as you get the employer’s match (and tax advantages), its worth contributing to 401(k) plan. Even if your plan has high fees make sure to contribute enough money to get the maximum match made by your employer. Since this employer’s match will overcome the damages caused by hefty fees. Fees should not become an excuse for not contributing to the plan. Stay in your plan but know how to reduce the expenses. Do not quit the game; rather learn the rule of the game and be a smart player.