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For the longest time, I didn’t realize there were fees in my 401k plan. I didn’t fully understand the insides and outs of how a 401k worked. I really thought it was just something companies provided us to help us save and that was it.
That was literally as far as my thought process went.
I didn’t realize another company was running my 401k plan. For example, at my previous job, Fidelity was in charge of everyone’s 401k plan. I don’t even know who provides the 401k plan for my current job. Now that I think of it, I should probably get on that. Oops.
Update!! It’s Transamerica. But regardless, I should’ve figured that out from the beginning.
Which kinda brings me to the point of this post and why it’s such a serious issue. According to a study done by AARP in 2011, 71% of people didn’t realize they were paying fees within their 401k plans.
That means only 29% did!
This is really bad. If you’re not careful, you can have hundreds of thousands of dollars swiped away by fees. Over 3 in 5 people didn’t realize how much they were paying in fees, and over a third admitted they didn’t know the impact fees can have on their savings.
But hey, at least over 81% think fees on investments are super important regarding decisions on their 401k investments. At least they acknowledge it’s important. That’s half the battle, right? Woohoooo!
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The Problem With Fees
The problem with fees is it can be very unclear where to find them within your 401k plan. You read the summary information and see your plan is automated to be within a target date fund and that’s about as far as most people I know get into it. It’s crazy to me to think even the people I work with don’t know where their money is going.
I know everyone there would rather be doing something else. The only reason they’re there is that it’s a safe, decently paying job. But let’s be real, the main reason we work (at least for me) is so that we can save enough to retire one day and do the things we actually want to be spending our time on. Nobody wants to sit in a cube all day. Just look at the health risks that come with it. If you’re not paying close attention to what your money is invested in, why even bother daydreaming about retirement? You’re being so irresponsible! It’ll never happen that way!
At least there’s been an increase in participation in the 401k plan. It’s better than nothing!
In the mid-1980’s, under 8 million people were participating, whereas, in 2009, 49 million people were. Even so, though I don’t know the exact numbers, I’m sure there were tens of millions if not, even more, who are working and are still not participating in a savings plan.
Even better, 8 in 10 believed the fees charged for their investments were important. But, the only thing I don’t like about that statistic is it doesn’t tell us if those 8 are doing anything about it. Are they taking action to minimize their fees or not? It’s not clear.
Sure, it’s all well and good to believe fees charged to their 401k plans are important but are they doing anything to take the damage the fees do to a bare minimum? Based on what I’ve seen at my own job, probably not.
But the good news is people aged from 25-49 years old were more likely than people aged 50 and above to seek more information about fees through the internet. More and more people are beginning to realize the significance and where to seek answers.
It was also found people aged 50 and above were more likely than the 25-49 age range to seek advice from a financial advisor. I’m not so sure that’s such a good thing. If the younger adults have been diligently doing their homework seeking advice from books, mentors, articles, etc., then yea that’s fine. But if they are doing this out of pure hubris, then that could be very dangerous. Remember there’s always more to learn and assume you’re probably wrong, so you do your homework. Don’t go in blindly into this kind of thing.
Knowledge in Understanding Fees:
- As I’ve mentioned, 71% of people reported they didn’t pay any fees
- 6% claimed they didn’t know whether or not they did
- People in the age range of 25-49 were more likely than the 50+ age group to admit they didn’t know how much they were paying in fees
- Only 29% were aware of how much they were paying in fees
- Another scary stat shows 10% were unaware of how much they have in savings and investments
What’s the point of working if you’re not going to save for retirement?!? I know some people truly love what they do for a living and wouldn’t trade it for the world, but at least half of you don’t. You actually probably hate it.
It can be really sad to see people unexpectedly get hit with fees from their 401k plans when they’ve been saving for decades without realizing it. Even high net worth individuals don’t have a clue how much they are being charged.
Even my own dad, in banking, didn’t realize the fees he was paying!! After I read all these books I was like dude you have a mutual fund that’s being charged 2% in management fees for returns below the average. That was when he started to read the books I was reading. Granted he chose the really short ones, but it did the trick! He got out of those asap. He also didn’t realize there were individual plans you could select from that had different amounts of fees in them for the 401k.
What exactly are these fees for?
- They can range from managing the mutual fund, advertising expenses, and redemption fees
- Even though the fees from the average mutual fund have come down, the average fee is still around 1.25%, which is WAY too much to be paying for below average performance
- If you don’t think it’s that big of a deal, check out the effect a .75% difference has over the course of 20 years:
The industry doesn’t want us to think fees are a big deal, so it’s not a priority for them to mention them to us.
Here’s another great example:
- You save $10,000 a year for 30 years with an average return of 7% and pay 0.5% in fees annually
- You’ll Finish with $920,000
- But, if you pay 1% in fees, the total slumps down to $840,000
- If the fee is a whopping 2%, you’re screwed and get under $700,000
For another perspective look at this chart:
Sure, you’re probably stuck with the provider your employer chose, but you have the choice of which fund or method of investment you want your savings to go into in most cases.
For example, here are some options of what’s available to employees I’ve found in my research:
- S&P 500 Index .01%
- T Rowe Price Blue Chip Gr Trust .40%
- Dodge & Cox Stock Fund .52%
- Putnam Equity Income Fd Cl R6 .56%
- T Rowe Price Mid Cap Eq Growth .61%
- Vanguard Selected Value Inv .35%
- Goldman Sachs SmallCp Value Ins .97%
- US Extended Equity Market lx Fd .03%
- EuroPacific Growth Fund R-6 .5%
- Non US Equity Index Fund .08%
- Mercer Emerging Markets Equity .99%
- US Bond Index Fund .02%
- PIMCO Total Return Fund .51%
- Invesco Fixed Income Fund .35%
- Vanguard Wellington Fund .16%
- PIMCO Infl Resp Mlt Asset Inst .83
- LifePath Index 2020 Fund L .09%
- LifePath Index 2025 Fund .09%
- LifePath Index 2030 Fund .09%
- LifePath Index 2035 Fund .09%
- LifePath Index 2040 Fund .09%
- LifePath Index 2045 Fund .09%
- LifePath Index 2050 Fund .09%
- LifePath Index 2055 Fund .09%
- LifePath Index 2060 Fund .09%
- LifePath Index 2065 Fund .09%
The main problem I have with these options is this is the only information you get. It’s as far as they go into detail. You can’t see what each of these plans is invested in, and what percentage is allocated to each type of investment within the mutual fund or target date fund. The target date funds are the ones with the dates estimating when you’ll retire. The idea is the closer you get to retirement, the “less risky” your portfolio is, most likely investing more in bonds. But, bonds suck.
The only thing you really know what it’s invested in is the S&P 500 index fund because it tracks an index. This is why I’ve chosen to invest all my 401k plan into it. Since 99% of actively managed US equity funds underperform, why wouldn’t I be happy being able to sleep at night simply tracking an unmanaged index?
If you take a look at my list of funds above, it’s the cheapest one available. We have decades of saving and investing in front of us to withstand several corrections and bear markets. What’s the rush? If I was worried about a market crash, then let’s face it: that probably means I’m old and don’t have enough saved, so I’m probably screwed if I hope on not having to go back to work again.
Also, going back to target date funds, I hate them. They irrationally invest way too much money in cash and bonds. Everyone acts like once you’re retired that’s it, no more exposure to the market.
But that’s where you’ll get the most return from. I understand people are worried about a crash or a correction, but you also are most likely going to live at least another 30 years or so into retirement. You need that money to grow. It won’t happen if it’s invested in bonds or stuck in cash. The average rate of inflation is a little over 3%. Get that money to work!
The worst part is every so often people at my job will ask me about this stuff. They don’t realize you can choose different plans. It amazes me how little time they invest in doing some research on this stuff, especially considering I know for a fact almost everyone there hates their job.
This is slightly off topic, but one time, when the pension was taken away, a guy didn’t even realize he was there long enough to have already qualified for one. Like dude, you complain the most out of everyone how it’s “another day, another 50 cents,” and you don’t even realize you qualified for a pension?? Where are your priorities man?
It’s incredible to me people don’t take more time to look over their plans. They look at me in awe when I tell them what our matching plan is (it recently changed), what plans are available and what the cheapest ones are.
I look right back at them like really, how do you not know this stuff? I actually had a colleague who sits behind me ask how often I check my 401k because he hasn’t checked his in a few years and was curious how often I do.
I first lolled inside because I can’t believe someone would go that long without looking, but I told him it’s probably a good idea to do an annual check up on it in case you want to increase your contribution by a percentage or even more if you get a promotion, which he actually did that year.
He looked at me like I brought him some newfound knowledge nobody’s ever head before. I felt bad!
I also accidentally one time saw another guy’s 401k total amount when he called me over for help. He had it up on his screen and it was something like $125,000. He’s 45 years old. Good luck dude, you want to live in Brooklyn your whole life. You’re not retiring when you want.
This is why you need to start saving money now. Put your money in the 401k plan that’s going to charge you the least amount. You need to take action on this asap, because nobody is going to do it for you. The human resources department doesn’t care if you don’t use the matching plan or if you’re using the cheapest fund available or not. It’s up to you to decide if you want to save more and invest more for your financial freedom.
What are you guys doing now to set yourself up for an awesome retirement? Are you contributing more to your plan? Have you taken a look at the options you have? Let me know!
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