3633: Hidden 401K Fees No One Talks About by Logan Allec with Saving Joyfully on Retirement Investing

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[00:01:00] This is Optimal Finance Daily. Hidden 401k fees no one talks about by Logan Allec with savingjoyfully.com. Contributing to a 401k or other retirement account can be incredibly satisfying, but you may not realize how much money you're spending on fees. In fact, your 401k may be charging you for a variety of things that you're not aware of, depending on how you use the account.

[00:01:27] This article will cover some of the most prevalent hidden fees in 401ks that could be draining money from your retirement fund. Remember to include all fees and other charges when determining how to use any extra cash. Do all 401ks charge fees? While some 401k providers don't charge fees, the truth is that the vast majority of people with 401k accounts are paying at least some fees.

[00:01:54] Providers are responsible for managing the funds in the account and making sure everything runs smoothly. Of course, these fees aren't exactly hidden, as the Department of Labor mandates disclosure of all fees from 401k providers. That said, you may not learn about those fees if you don't take the time to read the account's prospectus, which is available when you sign up and update it every year.

[00:02:20] You can also identify any 401k fees by reviewing each statement and looking for line items that represent fees. You may be surprised when you realize how much of your contributions are covering these costs rather than your retirement. 12b1 fees 12b1 fees are one of the most common and well-known charges associated with 401k accounts, and they're used for expenses related to selling plans to individual employers.

[00:02:50] Most 401k managers hire a middleman to market their accounts rather than making sales directly. The 12b1 fee is legally limited to 1% of your total assets, but a single percent can have a substantial impact on your retirement savings. They're typically listed as a marketing fee, and you'll be charged the same percentage each year, assuming your provider doesn't change the rules, regardless of how your assets performed.

[00:03:19] You'll pay more in 12b1 fees as you continue to contribute to your 401k, so they have the potential to drain a significant portion of your portfolio. In contrast, many other fees are flat rates that don't increase over time or as your investment grows. Administration While the 12b1 is intended to help providers market their accounts, administration fees cover the company's own expenses.

[00:03:47] These could include anything from employee salaries and administration to legal and accounting costs, and administration fees can vary wildly from one provider to another. Administration fees shouldn't impact your portfolio as much as 12b1s, and you probably won't be charged more than $50 or $100 each year. Of course, even a small amount of money may constitute a substantial portion of your 401k if you've only been making contributions for a few years.

[00:04:18] On the other hand, your employer may pay some or all of your plan's administration fees. This should be indicated in your employer's prospectus, so review a recent statement for more information. Depending on the terms of your 401k, it may be worth moving some of your investment to an IRA or another form of retirement savings. Investment Advisory

[00:04:41] Some retirement plans are passively managed, but others rely on investment managers to determine the best way to invest retirement contributions. Account providers generally charge advisory fees using a certain portion of your assets. Accounts Like 12b1 fees, investment advisory fees will cost more and more as your portfolio grows.

[00:05:04] A 1% advisory fee, for example, would only lead to a charge of $25 if you opened an account and made a $2,500 contribution. That said, it would grow to $250 once you reach a balance of $25,000. And it could be thousands of dollars by the time you reach retirement. Advisory fees apply to 401k accounts as well as a variety of other accounts.

[00:05:30] You may still be charged if you make an independent investment, but you could also put your money in a passively managed investment. A 1% fee on all assets is worth it if the account generates 2% higher returns than a passively managed alternative. Load fees Load fees are charged by mutual funds when you buy or sell, although some funds charge load fees at both times.

[00:05:57] Fees charged at the time of purchase are known as front-end, while those charged when you sell the stock are called back-end. Most mutual funds charge around 1% to 3%, although some are significantly higher. Depending on the way your funds load fees are structured, your current balance may or may not accurately represent the value of your account.

[00:06:19] If you've accumulated $100,000, for example, you may only have $97,000 after applying a 3% load fee. Again, load fees are typically associated with actively managed funds, so you won't be responsible for them if you're contributing to a passively managed investment with your 401k. Load fees may also be referred to as redemption fees or deferred sales charges. Transaction fees and commissions

[00:06:46] Some brokerages and account providers charge fees or commissions on each individual transaction, giving you an incentive to hold investments for as long as possible. Fortunately, transaction fees are getting less common as digital investment services become more prevalent. If you're being charged for every transaction, you should try to buy and sell as much as possible whenever you want to adjust your portfolio.

[00:07:12] This helps you spend less money on transaction fees compared to the total value of the transaction. A small $10 charge will add up to a lot over years of investing. 401k fees can be complicated, and you may not realize how much of your investment is going to a variety of additional charges. It's important to review your plan's prospectus every year to learn about any changes. Don't forget to take these and other fees into account when comparing different investment opportunities.

[00:07:45] You just listened to the post titled, Hidden 401k Fees No One Talks About, by Logan Alec with SavingJoyfully.com This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome.

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[00:09:09] Use code OPTIMAL at Monarch.com to get your first year of Monarch Core half off at just $50. That's 50% off your first year at Monarch.com with code OPTIMAL. Fees can be a huge drain on your portfolio's performance. So it's important to understand your specific situation.

[00:09:31] When it comes to an employer-sponsored 401k, more often than not, the company match and the tax savings more than cover the impact of fees. So it's still worth it to invest in the company plan. And many employers will cover the administrative fees while you're employed. This is why it's often advised to roll your 401k over into a traditional IRA if you stop working for the company.

[00:09:55] Load fees and advisory fees can be avoided if you self-manage and invest in low-fee total market index funds. But the tricky thing about 401ks is that you may be limited on investment choices. If your plan does not have reasonable fees and lacks even a few low-cost index choices, then you may want to approach your company's management with some suggestions for improving the plan.

[00:10:21] There's a great Bogleheads wiki page titled, How to Campaign for a Better 401k Plan, that might be worth checking out. It offers guidance on how to approach your employer about the 401k offering, and even includes a sample email you can send to motivate them to take a closer look. But that should do it for today. Have a happy rest of your day, and I'll see you tomorrow, where optimal life awaits. Let's see you tomorrow. Let's see you tomorrow. You can see you tomorrow. Thank you.