The goal of investing in a 401k is to make money for your retirement, however, in a volatile market, losses taken can drastically impact your nest egg. In addition to the risk of investments, if you’re using mutual funds in your 401k you could be paying exorbitant fees even when you lose money. CNN explains danger of hidden fees in mutual funds:
According to a recent AARP survey, 71% of people with 401(k)s didn’t even know they were paying fees for their retirement accounts.
So how much do these fees really cost you?
The answer may shock you. Fees can, on average, reduce your 401(k) balance by up to 30%, regardless of whether you have $1 or $1 million in your retirement account.
What are these fees, then, that are taking such a big bite out of your retirement account? There are four kinds: administrative fees, marketing fees (sometimes called 12-b1 fees), investment management fees and trading costs.
The first three types of fees are shown, as an aggregate total, in each mutual fund’s expense ratio, and are generally reported in your 401(k)’s “summary documents” as a percentage of assets.
But the investment industry disagrees, arguing that such costs are justified because mutual fund expenses are regulated by the competition of the free market, and what consumers are paying is simply the cost of doing business.
The problem with this argument is that it’s not true.
Index funds, for example, have often outperformed actively managed mutual funds while charging a small fraction of the fees. But investing more in index funds will not come close to fixing the broken, expensive 401(k) system.