Most people invest in a 401(K) plan with high hopes of strong returns on their investment. However, the only thing guaranteed when it comes to your 401(k) plan is that participation comes at a price.
According to a new Hearts and Wallets poll, many Americans don’t realize how much their 401(K) plan is costing them in fees.
The majority of 401(K) plans invest in mutual funds and ETFs, almost all of which charge an “expense ratio” for fund management. As of 2014, the average expense ratio for funds that invest in stocks was around 0.54 percent, which may seem small. However, for a number of Americans that don’t realize they are paying anything at all for their 401(k), several hundred dollars in fees per year could come as quite a surprise.
It Doesn't Matter How The Fund Performs
The bad thing about these fees is that they are taken out of a fund each year no matter how it performs. In other words, if your 401(K) loses 15 percent of its value in one year, you will still be paying these fees.
“When you add together the Americans who say they don’t know what they pay for their financial products and the number of people who say they pay nothing for the products they obtain through their retail financial stores, we have a major problem,” Hearts and Wallets CEO Laura Varas explained.
The good news for 401(K) participants is that expense ratios have generally been on the decline in recent years. ICI reports the average expense ratio for funds invested in stocks was 0.74 percent as recently as 2009.
According to etfdb.com, the following five broad equity ETFs all have expense ratios of 0.05 percent or lower:
- Schwab U S Broad Market ETF SCHB
- Schwab U S Large Cap ETF SCHX
- Vanguard Total Stock Market ETF VTI
- Vanguard 500 Index Fund VOO
- Schwab Strategic Trust SCHZ
If you want to know exactly how much you are paying in fees for your 401(K) plan, the information is required to be disclosed to you in your quarterly report from your plan’s provider. And by the way, the roughly $4 quarterly cost of providing this information to you may be deducted from your 401(K) by your employer.
Disclosure: The author holds no position in the stocks mentioned.
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