For years, we’ve been told that making maximum contributions to our 401(k) plan is the way to secure our retirement. Recent market declines have given reason for many to rethink this idea. What can be more devastating to your investment portfolio than market declines? Fees!
401(k) plans have a reputation for charging high fees. I’ve often wondered if the people at my company who select the 401(k) administrator don’t get some kind of compensation for doing so. The fees on investments are usually very high. In addition, there may be general administration fees and fees for selecting a pre-defined portfolio! I’ve seen some 401(k) programs even use investment vehicles that deduct a 5.75% front load for each dollar contributed! In 2008, I feared for a market correction and put all of my assets into a supposedly “guaranteed” interest option thinking that I would be safe here. But no, my account still went down for the year even though I had no stock or bond exposure. Fees took away more than I earned.
While not all 401(k) programs use expensive funds, you have to dig into the fine print to see what the fees are and for what. No administrator manages your retirement account for free. Determining how much you are losing in fees is an important factor in determining how much you should contribute to you plan. If you are paying high fees, find out how much your company is matching and contribute only that amount to the plan. While you will probably need to save more, establish an IRA plan and make additional contributions there if you can. If you don’t have the discipline to save outside of the 401(k) plan, then continue to save as much as you can to that plan. Keep in mind though, your lack of discipline will cost you money.
Better yet, engage a Personal Financial Consultant to review your retirement situation to determine how much you should be saving each year. Your consultant will show you the most efficient ways to achieve your goals while keeping your fees and risks to the lowest levels possible.
