401K Contibution Limits and the Impact from Fees

by Fern LaRocca CFP®

in 401k Contribution Limits

You may know your 401K contribution limits and contribute the maximum to that limit. But do you know how much of your contributions go to fees? When you look at the mutual fund fact sheet and see the fund fee expense ratio, it is easy to assume that fund fee is the only fee that you will pay. But that doesn’t tell the whole story. There could be revenue sharing fees and administrative fees that aren’t disclosed that take a bit out of every contributing dollar that you put in your 401K. What to do? Ask questions. Ask your plan administrator as well as your benefits department or human resources. Don’t be surprised if your company says they don’t know. Because of the complexity of calculating the fee structure of their 401K plans, many employers don’t really know the true cost they pay or what their employees pay- especially in smaller companies. Larger firms have more clout and are able to negotiate lower fees in plan costs. If possible, look for the separate accounts that have lower fees or passive mutual funds. No matter what the fee structure put at least the amount that your company is matching into your 401K plan. That’s free money. After that, high fee structures of 2% or more may make you consider other types of tax deferred accounts-like the IRA or Roth IRA -if you qualify.

Consider also that if you are married and one spouse has a great plan and the other doesn’t, max out on the one with the lower fees first, then max out on the part that is matched by the other plan and then review whether you want to make the maximum 401K contributions limits to the other plan.

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