As April 15 approaches, people become preoccupied with budgeting and finances. Tax time brings out the financial worrywart in all of us.
While it's not good to obsessively fixate on the stress of tax season, a heightened awareness of money isn't a bad thing.
For obvious reasons, investors are hoping to minimize costs and maximize savings when taxes are on the brain. Consequently, a lot of people have a lot of questions about 401(k) fees.
There are five primary fee types you could encounter as you invest in your employer's 401(k) plan; two of these types are investment-level and three are plan-level.
If you're concerned that having plan-level fees is unfair, remember that reasonable fees are good because you're receiving a service in exchange. What are you getting for your money? Typically, you're getting most if not all of the following:
- Tax benefits, including a free pass on capital gains taxation and the option to invest pre-tax dollars—which lowers your current taxable income and allows you both to invest a higher dollar amount and take greater advantage of compounding (you will, however, pay taxes when you withdraw your money);
- Automatic payroll deductions that just make life easier;
- An employer match or contribution.
Compared with an IRA or standard investment account, fee structures look different—higher here and lower there—so don't try to make an “apples-to-apples” comparison. Even if your research reveals that your plan fees are on the higher end, your employer contribution—if you get one—will probably mean that it's still worth investing in your retirement plan at work.
Since fee disclosure regulations took effect last year, we've seen complaints that statements are confusing for investors, and the promised transparency is a little muddled. If you find yourself in that boat, don't despair. Call your plan administrator and ask them to explain the fees and your investing options. If they don't answer all of your questions, consider working with an outside adviser or service that can help you understand.
Your ultimate goal is to come up with appropriate investment options with suitable fees. If your plan's overall fee structure is reasonable, you can build your nest egg through your 401(k) plan. If your plan's fee structure is disadvantageous, a retirement adviser can help you select other ways to reach your retirement goals.
If you believe your plan fees are excessive, bring it to the attention of someone at your company who deals with the plan. At a large organization, that individual may be in human resources; at a smaller company, it could simply mean shooting an email to someone at the executive level. Your employer is your plan sponsor, and some individuals who participate in the plan selection and administration process have a fiduciary duty to make plan choices that are reasonable and appropriate—and that includes fees.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.