Your 401(k) Fees Will Destroy Your Retirement

So, you started you new job as a CRNA and you’ve been able to sock away $18,000 to your 401(k) or 403(b). Great job, but don’t pat yourself on the back just yet. Whether working for a hospital system or an anesthesia group, chances are you may be paying a variety of fees that will ultimately add up to a substantial amount of money that will easily eat into your savings by retirement age. You need to be aware of what fees you’re paying. This isn’t simply about selecting a target date fund with an investment manager and then forgetting about it until you’ve retired. Not knowing how much you’re paying to have your retirement fund managed can cost you tens of thousands of dollars.

For example, let’s just say you’re 35 years old and you plan to work 30 years. You started your new job as a CRNA and have begun to contribute to your retirement. Again, for the sake of this example, let’s say you’re starting from $0. However, for the next 30 years, you plan on maximizing your contribution until you retire.

Screen Shot 2016-08-09 at 9.54.18 PM
Source: NerdWallet

We’ll get into all of the different kinds of fees that are assessed to retirement accounts a little later, but one of the biggest fees you ought to be aware of is the expense ratio, which is the cost investment companies charge to manage your mutual fund.

Now, using the illustration from above. Let’s say we have 2 funds that charge a different expense ratio. One fund charges 0.25% while the other charges 1%. Let’s take a look at the difference in costs after 30 years.

Screen Shot 2016-08-09 at 9.54.27 PM
Source: NerdWallet

1% may seem like a small percentage, but look at the difference that a 1% charge compounded over 30 years versus an expense ratio of 0.25%:  a whopping $289,247!!!A 1% expense ratio eats into nearly 20% of your retirement funds.

Some of the other fees that can assessed to the management of retirement accounts include:

  • Administration fees
  • Investment management fees
  • Sales charges
  • Mortality and expense charges
  • Brokerage account fees
  • Trade commissions
  • Mutual fund transaction fees
  • Sales loads
  • Management and advisory fees
  • Expense ratios

Some investment funds include the aforementioned fees into the expense ratio, while others separate them. There’s really no rhyme or reason when it comes to deciphering the byzantine nature of retirement funds. Check out John Oliver’s episode on retirement funds and you’ll see how insidious this whole industry really is. Better yet, check out PBS Frontline’s investigative piece on retirement. While the topic is boring, I can assure you that you don’t want to be spending 30 years of your life thinking that you’ve saved all this money only to watch it get eaten by taxes and fees.

So, how do you find out what kind of fees are being assessed to your funds? That’s the challenge and I don’t have a definitive answer for you because this information is difficult to find. My retirement funds are managed by Fidelity and it took me a long time to sift through the site to find out and if you happen to be using Vanguard or some other investment manager, then I really can’t help you. However, what you can do is call the plan administrator or contact your employer’s human resource office to discuss the fees that are assessed to the funds you’ve invested your money in.


Conclusion

  • Watch what fees are being assessed to your retirement account.
  • Look for retirement funds that have low expense ratios.
  • Call your plan administrator (i.e., investment manager representative) or employer human resource office and have them help you figure out what fees are being charged to the management of your funds
  • This will be discussed in a later blog post, but perhaps consider investing in a low-cost broad index ETF versus a mutual fund BECAUSE of a low expense ratio

 

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