New Battle May Erupt Over High Retirement Fund Fees
Are high fees eating into your investment returns? If so, you're not alone. And a recent U.S. Supreme Court ruling offers no help.
Last week, the Court reinforced an industry standard regarding "excessive" mutual fund fees from the 1980s. Some shareholder advocates say this ruling spark a new legal battle, including more litigation from investors who claim fund fees are too high.
Indeed, mutual fund and 401(k) fees can make a huge difference in your long term returns. A recent Charles Schwab study on 401(k) plans found 35 percent of employers are opting their employees into company retirement plans. But are they a good deal? Fee differences of just 1 percent can cut returns by 17 percent over a 20-year period, according to one government study.
You can find out the fees you're paying for your 401(k) plan and get a projection of how much those fees may eat into your potential returns. Log onto Brightscope (www.brightscope.com), a site that rates 401(k) plans and offers free reports about fees on 30,000 plans. You can also research your company's plan yourself by requesting the Summary Plan Description from the human resources department or plan administrator.
So, how do you know if your plan's fees are too high? Christine Benz, director of personal finance for Morningstar , say investors should be on the lookout for 401(k) plans with administrative expenses above 0.5%.
Also, Benz points out: the average expense ratio for actively managed U.S. stock funds is 1.23%. The average expense ratio for stock index funds is 0.72%. And the average expense ratio for stock exchange-traded funds is 0.53%
Try to find the low-cost options within your 401(k), including index funds, ETFs and collective trusts. If you think your 401(k) is charging high fees, you can invest elsewhere. But first:
1. Invest enough money in your 401(k) to get the matching contribution from your company, if one is offered.
2. Once the company match is in hand, if you want to invest outside your 401(k), consider a Roth IRA—which allows you to make withdrawals from the account tax-free after age 59 1/2—to hedge against future tax bites. You can contribute up to $5,000 to a Roth IRA until April 15 and still have it count toward the 2009 tax year. Roth IRA contribution limits are $5,000 for 2010, too ($6,000 if you're age 50 or older).
3. If you can max out a Roth IRA contribution, leftover retirement contributions can usually still go into your 401(k). You'll reduce your taxable income and the benefit of tax-deferred growth may outweigh the savings on fees in a taxable account.