Nearing Retirement? Ditch ‘Hidden’ 401(k) Fees
Your 401(k) may be costing you more than you realized. An in-service direct transfer to an IRA could be a game changer – if you qualify.
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.
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.
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