Scam Alert: Your 401(k) Is Hemorrhaging Money

Dear Money & Crisis Reader,

There’s a leak in your 401(k).

Paycheck to paycheck, your loss is so small that most folks don’t even notice the cash spilling out.

But over time it all adds up… costing you upward of $130,000.

Yet according to a study by NerdWallet, 92% of Americans have no idea that this money is being skimmed from the top of their 401(k).

Management and administrative fees make up the bulk of this loss.

And while it’s impossible to avoid all 401(k) fees, most folks are grossly overpaying because they have no idea there are more affordable options out there.

How Much Money Are You Losing?

According to Consumer Reports, fees are the best predictor of a fund’s performance: “Over the long haul, higher fees drag down a fund’s overall return.”

Depending on your 401(k) plan, it’s likely that you’re paying somewhere around 1% in fees.

One percent may not sound like a lot on the face of it. But when you take into consideration the large amounts of money and time you spend investing in your 401(k), it adds up to some staggeringly high losses.

In fact, the Center for American Progress estimates that if you started earning a median salary at age 25, you would lose a total of $138,336 to a lifetime of fees.

To put that into perspective, over the course of a 20-year retirement, your spending money would be reduced by $576 per month.

That’s no small chunk of change. Just $500 per month can mean the difference between a comfortable retirement and living paycheck to paycheck.

So what can you do about it?

Low-Fee Investments

Your first step is to consult your 401(k) plan to work out how much money you’re spending on fees and review your plan options.

You’re never going to be able to kick all of your management and administrative fees. But reducing these fees will save you thousands of dollars in the long run.

The easiest way to do this is to choose funds with the lowest expense ratios.

Index funds are a good place to start.

Index funds are a diverse basket of investments that seek to match the performance of existing indexes.

Because of this, index funds need much less day-to-day managing, which keeps management fees low.

If you’re worried that means you’ll be seeing smaller returns from your investments, think again.

According to a 2015 study, index funds outperformed actively managed funds across the board between 2004 and 2014.

One big-name supporter of index funds is legendary investor Warren Buffett. In 2007, he made a $1 million bet that an index fund would outperform hedge funds over 10 years — and he won.

Buffett’s index fund returned 7.1% compounded annually, while the basket of hedge funds his competitor chose returned an average of only 2.2%.

Of course, depending on the plans available to you through your employer, this option might not be on the table.

If this is the case, you should discuss expanding your options with your employer.

By law, they are required to offer you a fair plan. But I wouldn’t go as far as to bring that up. Most employers will be open to discussing plan options with their employees.

Another option is to take a portion of your managed assets out of your 401(k) and roll it into an IRA. IRAs offer a wider range of investment choices, many of which have lower fees.

As always, we welcome feedback from our readers. If you agree, disagree or have any topics you’d like us to investigate, you can email me right here.

All the best,

Owen Sullivan
Editor, Money & Crisis

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