If you’re closing in on retirement — maybe five to 10 years away – you’re probably paying more attention than ever to your 401(k) balance and returns.
But when was the last time you took a hard look at how much you’re paying in “hidden” 401(k) plan fees?
Although the Department of Labor says plan sponsors must provide a breakdown of account charges at least once a year with a participant-fee-disclosure notice, many people never read theirs — or even the portion of their quarterly statements that contains information about expenses.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That’s a mistake.
The goal of a 401(k), after all, is to save as much as possible for retirement. And that’s harder to do if, over time, high hidden plan fees keep nibbling away at that money, reducing the growth in your account.
How Much Can 401(k) Fees Cost You?
Even in the short term, from one year to the next, hidden fees can do some damage — especially if you manage to stash away a significant amount in a 401(k) or similar employer plan.
That doesn’t mean that you shouldn’t take advantage of the convenience of saving in an employer-sponsored plan or the opportunity to get matching contributions.
But if you’ve got $1 million in your 401(k), and your plan charges 1% of your account balance to cover its hidden fees each year (a typical amount), that’s $10,000 coming out of your 401(k) balance every year.
That’s not a nibble. It’s a bite. And some investors pay 1.5% or even 2% in hidden plan fees on 401(k) plan assets every year.
Could an In-Service Direct Transfer Help You?
Though you may be thinking of your account fees (if you were aware of them at all) as “the cost of doing business,” that’s not necessarily true. Even if you’ve been saving in the same plan for decades and have a healthy nest egg sitting in your 401(k), you may be able to cut your hidden plan fees.
In fact, if you’re 59½ or older, you likely have a strategy available to you that your younger co-workers don’t. It’s called an in-service 401(k) direct transfer, and it could make a lot of sense for you.
What’s an in-service direct transfer?
You’ve likely had friends who have transferred funds from a 401(k) to a traditional or Roth IRA when they left one or more jobs through the years. Or maybe you’ve done it yourself. Well, an in-service direct transfer works much the same way. If you’re 59½ or older, and your employer’s plan allows it, which most do, you can move your balance directly from your 401(k) to an IRA and enjoy several potential benefits, including:
- More control. With an IRA, you may have greater fee transparency. You’ll have to do your homework to be sure your new account is less expensive than your employer’s, but doing a direct transfer into an IRA could save you in hidden 401(k) plan administrative fees, mutual fund expense ratios and other hidden costs that can reduce your returns.
- More investment choices. IRAs generally can offer a wider range of options than 401(k) plans, which can be limited. So not only will you have a potentially better opportunity to comparison-shop for investments with lower costs, you may also be able to add more diversity to your portfolio as you move toward retirement. An IRA can put you in a position to invest in stocks, bonds, exchange-traded funds, real estate investment trusts, precious metals and more.
- It may make it easier to do a Roth conversion. Many 401(k) plans don’t have a Roth option, and many that do don’t have a Roth conversion option. But if you perform an in-service direct transfer to an IRA, you can perform Roth conversions if and when you choose.
- You can still contribute new money to your 401(k). If your employer offers a matching contribution, you can continue contributing to your 401(k) to get that money. Your account will remain open, so you can keep the convenience and benefits of your workplace retirement plan, but you’ve removed the effect of paying hidden 401(k) plan fees on your entire balance.
Get Some Answers Before You Act
Because different employer-sponsored plans have different rules, you should ask your plan administrator about eligibility and other requirements before you move forward with this strategy.
It’s also a good idea to discuss your concerns about account fees — and the strategies available to help reduce them — with an independent financial adviser.
Every financial decision comes with pros and cons, so you’ll want to thoroughly talk this one through. An adviser who has a legal obligation to look out for your best interests and can help you maximize your retirement plan savings … even if your retirement is just a few years away.
Kim Franke-Folstad contributed to this article.
Scott Tucker Solutions, Inc is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Scott Tucker Solutions, Inc. are not affiliated companies. 1122250 – 11/21
Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency.
Appearances on Kiplinger.com were obtained through a paid PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
-
Selling Your Haunted House? What You Have to Tell Buyers (and What You Don’t)You don’t need ghosts to spook buyers, sometimes a home’s past is enough. Here’s what sellers should know about disclosure laws, pricing and perception when a property has a haunted history.
-
CMS Brings Back Furloughed Staff for Open Enrollment LifelineThe government has recalled approximately 3,000 workers to assist with Medicare and ACA Marketplace Open Enrollment.
-
Debunking Three Myths About Defined Outcome ETFs (aka Buffered ETFs)Defined outcome ETFs offer a middle ground between traditional equity and fixed-income investments, helping provide downside protection and upside participation.
-
This Is Why Judge Judy Says Details Are Important in Contracts: This Contract Had HolesA couple's disastrous experience with reclaimed wood flooring led to safety hazards and a lesson in the critical importance of detailed contracts.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and AroundIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
