Many consumers, unfortunately, are unaware how much of their retirement savings are getting eaten away by high 401(k) and mutual fund fees. A recent NerdWallet Investing survey found that 9 out of 10 Americans underestimate the average 401(k) fees they pay over the course of their lifetime by more than $150,000.
Here are three powerful ways a casual investor can save more for retirement by cutting down on unnecessary fees:
1. Pick funds with low expense ratios. One of the best performance indicators of a mutual fund is its expense ratio. Not only will picking mutual funds with expense ratios at or below 0.5 percent save you money compared to funds with expense ratios more than 1 percent, but they’re also likely to significantly outperform other mutual funds over time.
In general, index funds have substantially lower costs than actively-managed mutual funds and can save you money on fees without sacrificing performance. In fact, only 24 percent of active mutual fund managers beat the market index over the last decade, with active managers charging more fees on average than the value they created, according to a recent study by InvestingNerd.
2. Compare your 401(k) plan’s offerings. If you’re looking to enroll in a new retirement plan, first analyze the mutual funds and index funds your company offers and see how the plans stack up against each other. Expense ratio is a key metric to look at, but there are also other variables to consider. For the novice investor, NerdWallet’s 401(k) Fund Selector allows you to compare and rank funds offered by your employer’s retirement plan through searching a stock of more than 13,000 funds available to retail investors.
3. Identify hidden fees—and then take action. There are up to 28 types of fees that can impact your returns on a 401(k) account; being aware of what they are is the first step to minimizing expenses. These fees operate at three levels: fees from the service provider, fees included within the expense ratio and any other mutual fund transaction costs. Fees should be laid out in a fund’s prospectus, but it can sometimes be difficult to tell how much of a difference these make to an individual’s lifelong portfolio.
Nonetheless, the losses can be staggering. A recent Department of Labor case study estimated that a 1 percent difference in fees could reduce a retirement account balance by 28 percent by the time a worker reaches retirement. If your employer’s plan comes with high fees, it could be worth reaching out to human resources to request the company switch providers or open a self-directed IRA on your own.
Fees attached to 401(k) plans can be confusing to navigate, but the overarching message is clear: Reducing one’s investment fees in every way possible can save a lot of money over time.
Susan Lyon is a senior strategy analyst for NerdWallet Investing, a financial literacy website that helps investors select better mutual funds for their 401(k) plans, find the best Roth IRA account provider and make smarter investment decisions overall.