It's been said that a penny saved is better than a penny earned, because a penny saved isn't taxed, so you get to keep the whole penny.
People have been keenly focused on cutting personal and household xpenses since the Great Recession struck. We've refinanced mortgages, changed phone plans, used less energy, delayed vehicle purchases, trimmed insurance costs, eliminated bank fees, clipped coupons, maximized tax savings, purchased second-hand goods, jumped on attractive financial offers and more.
But many of us — those of us with retirement accounts — may have overlooked the charges we're paying companies to manage our savings. This became clear to me when I started getting questions from friends and co-workers about their latest 401(k) plan statements.
Under new federal regulations that took effect July 1, investment expenses that were often hard to determine are now prominently listed on 401(k) statements. The expenses are the annual cost of each investment option, shown as both a percentage and a dollars-per-thousand amount.
That means you'll be able to easily see that if you invest in Fund X, they'll take 0.71 percent of the your investment's value each year for expenses, or $7.10 per $1,000. And if you invest in Fund Y, annual expenses might be 0.21 percent, or $2.10 per $1,000.
The difference annual fees can make over a long period of time cannot be understated. Think of it like the interest on a mortgage, and consider what a single percentage point can mean over 20 or 30 years. The U.S. Department of Labor offers this telling example:
“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.”
Simply put, paying an annual fee of 1.5 percent, rather than half a percent, would cost the person in that example $64,000 in retirement savings. Ouch.
The numbers get large over time because the fees are not only an expense, but a deduction of money from the retirement fund — money that would otherwise grow and compound over many years.
So, what can you do with this information about fund expenses?
Make sure you aren't paying more than you need to. You may have limited choices in your 401(k) plan, but even among a small number of investment funds, fees can vary widely.
How much is too much? Some mutual funds charge less than 0.25 percent of the fund's value as an annual expense. I would consider anything over 1 percent too high.
If you have funds in a 401(k) plan from a prior employer, you have the option of rolling that plan directly into an IRA account, which could have investment options with lower expenses.
If you have multiple retirement accounts, such as a 401(k) and an IRA, look at them together and find the best mix of low-cost investment options. For example, my 401(k) and my IRA both offer target-date funds for people hoping to retire around 2035. One has annual expenses of 0.19 percent, the other, 1.8 percent. Which would you choose?
I'll be the first to admit that it's easy to look right past an investment fund expense that could amount to less than 1 percent yearly. Big deal, right? It's sure hard to notice those fees when times are good.
But consider that the stock market today, as measured by the S&P 500 index, is right about where it was five years ago. When you're not making any money, losing even a half-percent of your investment fund each year starts to sting.
So check those new 401(k) statements. They're much easier to understand than they used to be, and you may be surprised to learn how much you've been paying.
Reach David Slade at 937-5552 or Twitter @DSladeNews.
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