MILLIONS of Americans with 401k accounts don’t fully understand the fees they’re being charged – and it can can them thousands of dollars.
Around 89million Americans have one, yet 40% don’t understand the fees associated with the accounts, according to a new 124-page report by the Government Accountability Office (GAO).
Some savers are unaware that they’re even paying fees on their accounts.
The lack of knowledge persists even though the Department of Labor has required providers to disclose fees to savers since 2012.
Chairman Scott Murray said: “The GAO’s findings are a wake-up call for the Department of Labor and for consumers who have 401k plans.
“This report is clear evidence that the Department of Labor should require plan providers to make fee disclosures easier to understand and ensure that participants are fully informed about how these fees impact their savings.”
“People making decisions that will affect their financial security for years to come need to have clear, complete, information.”
How to avoid expensive fees on your 401k accounts
Not understanding the details of your 401k, including the administrative and investment fees, can eat into your savings over time.
In fact, a yearly fee just one percentage point higher could mean tens of thousands of dollars less when it comes to retirement.
A 2006 report from the GAO found that a 45-year-old worker with 20 years until retirement and $20,000 in a 401k with a 0.5% fee would have about $70,000 when it came to retirement, assuming a 7% investment return.
The same worker being charged a 1.5% fee would end up with $58,400 in the same time period – $12,600, or 17%, less.
What is a 401k?
A 401k allows you to dedicate a percentage of your pre-tax salary to a retirement account.
Employers can also choose to match some or all of the contributions, but this isn’t required so it’s not guaranteed.
There are two basic types of 401ks – traditional and Roth – with the main difference being how they’re taxed.
In a traditional 401k, employee contributions reduce their income taxes for the year they are made, but they’ll pay tax when they withdraw cash.
With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free.
Since it was launched in 1978, the 401k plan has become one of the most popular types of employer-sponsored retirement plans in the US.
While you can’t do much about administrative fees, you can reduce investment fees to a minimum if you definitely want to save in a 401k.
A 401k generally doesn’t let you invest in individual stocks, but there are a wide range of funds available – and the fees for them vary.
For example, target-date funds are intended to maximize your investment based on your expected retirement date, but these can come with hefty fees.
The same goes for actively managed mutual funds, which uses a single or team of managers to try to outperform the market.
To find out the fees charged for your 401k, go to your plan’s annual summary report and find the basic financial statement section.
Alternatively, check the fee disclosure statement, or contact the provider directly.
If your fees seem too high, you can speak to your HR department or plan manager about adding index funds to your investment options.
Going forward, the GAO watchdog made five recommendations to the Department of Labor of how to improve saver’s knowledge.
These were to include the actual costs of fees paid in quarterly disclosures and details on the effect of fees on savings over time.
In other 401k news, households are being urged to reclaim lost cash worth up to $5,000 sitting in the accounts.