Want to increase your 401(k)’s returns by up to 28%?
Here’s a simple way to do it:.
Don’t focus on fund selection or the asset mix; just look at the most mundane, boring statistic in investing: fees.
Fees are off the radar screen for most 401(k) plan participants, and sadly, even their 401(k) plan administrators, but in today’s higher risk, low-return environment, one of the very few things an investor can control is fees.
Here is some of the simple arithmetic from the U.S. Department of Labor that drives home the importance of fees in a 401(k) plan:
“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. <b>The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.</b>“
In this example, the return is reduced by a staggering 28%. To make matters worse, it is not exactly clear what investors receive from paying all those fees after 35 years, aside from a four-page quarterly newsletter.
While it certainly costs money to administer 401(k) plans, this example shows that there is room for improvement on the part of plan administrators to reduce expenses.
This DOL example also assumes a 7% return over 35 years. While that may be the close to the historic equity return norm, the 7% return is open to question given the prolonged global recession and real estate crash. If the return is lower, your retirement lump sum drops significantly. But again, the investment return is outside of an investor’s control.
Fees Can Be Controlled
However, the most important variable you can control is fees, and even that is largely the responsibility of your employer, who may or may not, be acting in your best interests.
One of the few decision options open to employee-investors in 401(k) plans is to firmly ask your plan administrator for a detailed breakdown of the plan’s costs.
Since the DOL example dramatically points out what can happen to an investor’s money over 35 years, it is imperative to get answers which demonstrate that the corporate 401(k) plan administrator is working on behalf of the plan’s own employees, not 401(k) plan providers.
Smart investors know that the risk of loss is more important than posting investment returns. This risk can be easily reduced by reducing expenses, which directly reduces total investment returns.
Another great reason is even simpler: It’s your money. If you don’t watch it, do not expect anyone else to do it for you.
