Man shoveling pennies from 401(k)

Reduce Fees in your 401(k) in 3 Easy Steps

Posted on Posted in 401(k), Invest, Retirement

These hidden costs may be stealing from your future self's pocket.

The title of this article may be confusing. We've always heard that in order to secure a safe financial future, we need to save, save, save. And the ideal investment vehicle to do that: the 401(k). So what gives?

Here's the question: is saving for a 401(k) still a good idea, even if I'm being charged fees?

The answer is yes.... and no. It all depends on how much it's costing you.

Maybe the info below will clear up that vague answer a bit. Here's our first step:

Step #1: Eliminate costly investments that are there for the sake of 401(k) "Diversification"

We've all heard how important it is to not put all your eggs in one basket. In general, we agree with that advice. However, in taking this recommendation at face value, it opens up the potential for a saver to enroll in costly alternatives just to be "diversified".

What should I do?

Review your investment options within your 401(k) administrator's online portal. You may have selected (or were given as default) what's known as a Target Date Fund. Check to see what holdings make up the fund, as in many cases these funds are made up of other mutual funds or ETFs. (again, for "diversification") You may even be able to invest in these funds directly, saving yourself a double-charge. (both the Target Date Fund and the funds within will have their own expense ratios)

Step #2: Research your 401(k) options for costs and diversification

Each investment choice will have an accompanying document called the Prospectus. This document will contain all the information you need to know about that particular investment option. However, we would like to call your attention to just 2 pieces of information from the prospectus that will expedite this process:

  • Expense Ratio
  • Investment Holdings

First, the expense ratio. This is the cost of the investment expressed in percentage terms. This is charge is generally deducted quarterly. You can find that amount by the following calculation:

Current 401(k) balance * expense ratio % / 4 (quarterly)

Second, take a look at the individual holdings of the investment. There will be a summary page in the prospectus that generally lists the top 10 holdings of the investment. That will be the best place to start so that you can tell whether the investment you've chosen actually helped you diversify, or if that was all hogwash. The proof is in the pudding!

READ: Optimize These 5 Accounts for Early Retirement
Step #3: Consult outside sources for additional 401(k) investment information

One of the best websites for gleaning the information you need is Morningstar.

Morningstar is an easy-to-navigate site that has all kinds of information on any investment you may be interested in. For your purposes, look through the prospectus and see if it describes an index that the fund follows. If it does, go to Morningstar and type the "ticker" symbol for this fund in the "Quote" box.

If you were struggling to find the stats you needed, Morningstar will clear that up right away!

Another great site for this is etfdb.com. It's a great resource for facts about Exchange Traded Funds.

What other tips might help to reduce 401(k) fees? Any steps you would add? Mention them in the comments below.

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The author of this article is not a licensed professional. This article and all information presented is for informational purposes only and should not be taken as financial or legal advice. We recommend our readers to consult with a licensed professional in the appropriate field prior to making any investment decisions.

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