How Much Does Your 401(k) Plan Cost?Paul-Martin Foss
Fees charged on 401(k) plans have been falling for years, but that decrease has slowed down recently. The average 401(k) plan expense ratio is now 0.41%, down from 0.52% in 2013 and 0.42% in 2016. Lower fees are important to investors for a number of reasons.
The primary advantage of lower fees is that you lose less money from your investment returns. If two identical funds offer 6.5% annual returns but one has a 1.2% expense ratio and the other has a 0.2% expense ratio, then you’re losing out on 1% of annual returns by choosing the one with the higher expense ratio. If one fund offers 7% returns but charges 1.2% and another fund offers 6.4% returns but only charges 0.2%, then the fund with the lower return would gain you more money – 6.2% versus 5.8%. That’s why you have to look at the return after expenses, not the headline numbers. Over the course of a career, investing in an expensive retirement fund could end up costing you tens or even hundreds of thousands of dollars.
In an era of lower than normal investment returns, it’s important to minimize the amount of money you spend on fees. Having your investment returns siphoned off by management fees doesn’t do you any good. Particularly as investment strategies have moved from active investment, in which fund managers are constantly looking to find stocks that beat the market, to passive investment in which fund managers are just trying to match a particular stock index, it doesn’t make much sense to pay someone a huge amount of money just to sit and watch your money. That’s why some employers are able to negotiate fees down even lower than the average.
If your employer doesn’t offer a wide variety of investment options for your 401(k), or if the expense ratios are so high that your returns aren’t growing, you might consider looking at other investment options. You could even roll over your assets into a gold IRA if you think it makes sense for you. The key is for you to take an active role in your investments and ensure that you are maximizing your retirement assets and protecting your wealth.