Make Sure Fees Aren’t Eating Away at Your Retirement Savings

By Britt Erica Tunick

Saving for retirement through a 401(k) plan is a no-brainer, especially if you work for an employer that matches a portion of the money you invest. While most 401(k) contributions are automated, it doesn’t mean you should take an entirely hands-off approach to your savings. Failing to monitor your 401(k) investment portfolio could leave you open to paying unnecessary fees that have the potential to significantly eat away at your portfolio’s overall profitability.

Though fees are an unfortunate reality of managed investment portfolios, there are ways to ensure that you aren’t being charged excessive ones. One of the most widely abused fees are shareholder service fees. Occasionally labeled as sub-transfer agency fees, shareholder service fees are pulled from a person’s 401(k) portfolio to cover the charges that a mutual fund levies for recording everything from the number of shares that each individual owns in the fund at any given point in time, to all of a portfolio’s individuals trades. Even though there have been multiple lawsuits filed against 401(k) plan managers for charging excessive fees, the practice still remains fairly common and fund managers often get away with it because many people don’t even realize that they are overpaying. In some cases, funds will charge as much as 0.20% per year, which can substantially reduce the amount of compounded growth an individual will benefit from by the time they retire. As a rule of thumb, mutual funds should not charge anything over 0.05% per year. If the funds in your 401(k) charge more than that, it is worth your effort to shop around for funds with lower fees.

One of the easiest ways to circumvent high fees is to invest in mutual funds whose investments shadow a specific index, which usually don’t charge shareholder service fees. Just keep in mind that the danger of investing in an index fund is if the market as a whole takes a significant downturn, then the stocks within that index are likely to take a collective hit. So, while index funds can be an attractive option, make sure not to put all of your 401(k) holdings into any one fund and have some diversification within your portfolio, such as bonds or other forms of debt.