Contributing to a 401 (k) plan is one of the most effective ways to build wealth for retirement. But new data shows that many savers may not be making the most of their employer plans.
That’s because about 40% of 401 (k) plan participants don’t fully understand the fees they’re paying, according to a report released Thursday by the Government Accountability Office.
Are you in the dark about your 401 (k)?
About 87 million workers have access to 401 (k) s. But a lack of knowledge about 401 (k) fees could cost savers a lot of money over time.
There are two types of 401 (k) fees that you will need to consider: administrative fees and investment fees. The administrative costs are not really in your control (although you can choose to save in an IRA over a 401 (k) if your plan costs are out of control). But you have the option of keeping your investment costs to a minimum.
There are different types of funds that you would typically find in a 401 (k), keeping in mind that these plans typically don’t allow you to buy individual stocks:
- Target date funds
- Actively managed mutual funds
- Passively managed index funds
When you first sign up for your company’s 401 (k) and don’t specify your investment choices, you will usually automatically be placed in a target date fund. These funds are designed to invest more aggressively from the start and shift to safer investments as their designated milestones approach. Target date funds are not perfect for a number of reasons, one of which is that they can charge high fees that reduce the returns they could be successful in generating.
Actively managed mutual funds, on the other hand, are notorious for charging high fees. The logic is that you are paying for the expertise of a fund manager whose job it is to select a unique mix of stocks (or other investments) to make your money grow.
Actively managed mutual funds can offer high enough returns to offset their high fees – sometimes. But often index funds are able to match or even outperform actively managed funds.
Index funds are passively managed funds that aim to track the performance of different benchmarks in the market. a S&P 500 The index fund, for example, will aim to achieve performance comparable to that of the S&P 500 itself.
If your goal is to minimize the investment fees charged to you in your 401 (k), then index funds are a good bet. And as mentioned, you might not end up compromising on performance, as index funds typically outperform their actively managed counterparts.
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Don’t sell your savings short
There is a good chance that you are working hard to make money to contribute to your 401 (k). So the last thing you want to do is lose higher returns because the fees keep eating into them.
If your 401 (k) administrative costs are too high, consider other savings options. At the same time, invest your money strategically in order to minimize the fees you pay.
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