Clark Howard Staff
Do you know how much money you’re paying in fees and other expenses associated with your investment accounts? If the answer is no, you’re not alone.
If you’re a fan of Clark.com, you may be familiar with our thoughts on 401(k) accounts — it’s a great way to make yourself save for retirement, especially if you choose automatic withdrawals from your paycheck and contribute enough each year to get the employer match.
But your potential savings are significantly reduced if you make the same mistake that more than 90% of Americans make: ignoring how much you’re paying in fees!
According to a study by NerdWallet, 92% of Americans have no clue what they’re paying in 401(k) fees.
That’s a big problem if you want to get the most out of your savings efforts. For the average person, these fees could mean the difference of thousands, and for some people, it could mean the difference of hundreds of thousands.
Why you need to pay attention to fees
The average 401(k) plan’s fees equal roughly 1% of assets under management. Now 1% may not seem like a lot, but you have to remember that you’re not just forking over 1% (or more) of however much you’re contributing; you’re also giving up that same percentage of your savings as they grow.
An expense ratio is the annual fee investment funds charge. It is the overall cost of maintaining the fund, including management fees, administrative fees, operating fees and other costs.
And while some 401(k) fees are unavoidable, you do have the power to limit the impact they have on your savings each year — which will save you a ton of money of over time.
In fact, according to Consumer Reports and Morningstar, fees are the best predictor of a fund’s performance: “Over the long haul, higher fees drag down a fund’s overall return.”
The impact fees have on your investments over time
Vanguard has a tool on its website that shows you how expenses can erode your investments over time.
For example, if you had a $10,000 investment, a return of 6% and an expense ratio of 1.02%, after 25 years, you would have kept $23,301 and spent $9,617.
But if you had a $10,000 investment, a return of 6% and an expense ratio of .20%, after 25 years, you would have kept $30,828 and spent $2,091 in fees.
That means the difference between a .21% expense ratio and a 1.02% expense ratio would be $7,526!
Can you imagine the difference when we’re talking $100,000 versus $10,000 invested? If we add another zero to the above equation, we’ll see that this can mean the difference of $75,260 in fees over 25 years of investing — fees that could have been avoided if they were invested in low-cost funds. This extra money could mean the difference of 2-5 years in retirement, depending on the financial needs of the retiree.