We all know that we’re supposed to be investing in tax-advantaged retirement accounts — for the good of our financial futures. The foundation of your financial future is supposed to be the 401(k). And, for many people, the 401(k) is a great option that allows them to save up for retirement, earn returns that they wouldn’t get elsewhere, and prepare for the future. However, the truth is that you don’t need a tax-advantaged retirement account to be successful. And, in some cases, your 401(k) may actually be draining your wealth.
Fees, Fees, and More Fees
One of the biggest problems with company-sponsored 401(k)s is that they come with fees. Often, they come with a lot of fees. These fees eat into your returns, draining your wealth, and reducing the effectiveness of your retirement savings. Here are some of the fees that you might not even realize you are paying when you have a 401(k):
- High mutual fund expenses: Unlike an IRA you open on your own, the 401(k) often limits your options. This means that you might be investing in a mutual fund with a high expense ratio. You might even be paying sales loads. These fees cut into your earnings.
- Record keeping fees: Some plans actually charge these on top of the mutual fund fees you could be paying. These types of administrative fees might be flat, or they might be a percentage of assets.
- Advisory service fees: Yes, if your employer hires a 401(k) consultant, that is a fee that can be tacked right on to the cost of your plan.
- Transaction costs: In some cases, transactions costs are paid out of fund assets. That means that you are reducing your potential returns.
According to a study cited in the Los Angeles Times, the average nest egg sees a reduction of 30% due to 401(k) fees. The fees listed above might only be the beginning.
Really, fees are a huge concern when it comes to your retirement planning. Fees not only cut into your returns, but they can also reduce your principal. A reduced principal means that you have less money working on your behalf. This can be a real problem later, and reduce your effectiveness.
Other Issues with 401(k)s
While a good 401(k) plan with low cost options can be a helpful retirement planning tool – especially if there is an employer match involved – there are plenty of issues with 401(k)s. In some cases, you might have a retirement plan loaded up with company stock. What if the company tanks? In other cases, the fund managers or plan managers might be incompetent, making bad decisions with your retirement portfolio, and putting your future at risk.
Another issue is that you might not have the options to create a truly balanced portfolio. In those cases, you can lose a great deal of money if the market tanks. Indeed, there is always the risk of loss, and many 401(k)s are particularly vulnerable to market setbacks. If a setback happens just as you are getting ready to retire, your 401(k) isn’t going to be much help.
Before hanging your retirement hopes entirely on a 401(k), do the research, and know your options. Consider other ways to build a healthy nest egg.