You’ve heard that some people think they pay no fees for their 401(k) plan. You’re not one of them. You know where to look for those ‘hidden’ fees. You also know what you can or cannot do if you think you’re paying too much.
What’s more, you know it takes a lot of effort to move from a lack of awareness regarding 401(k) fees to researching and implementing exactly what your options are.
But did you know the effort may not be worth it. There may be better alternatives. They represent an easier path with more certainty in giving you what you want.
The bottom-line: fees only measure one thing, and it may not be the thing you desire the most.
“Price is what you pay. Value is what you get,” says Thomas J. Scalici, Chief Executive Officer at Cornerstone Advisors Asset Management in Bethlehem, Pennsylvania.
When you consider it, there’s only one thing that matters. Fees represent but a single dimension on your journey towards achieving that one thing. In fact, fees might even suggest you’re doing exactly what you need to do to get to your intended destination.
“The goal most individuals have for their 401(k) plans is to build up a nest egg for their retirement,” says Hannah Whatley, Financial Advisor at Rather & Kittrell Capital Management in Knoxville, Tennessee. “So, any fee you pay within 401(k) plans should enhance your progress towards that goal. If you are a plan participant and you need access to financial planning that is not available through your 401(k) plan, then paying an additional fee for an additional level of service makes sense. In the same way, if you are a plan sponsor, the fees you pay for the plan should determine the level of service available to your participants.”
If you’re interested in getting the most bang for your buck, you should be thinking about what you could do to enhance your chances for retirement success, not just what others can do. This begins with the most fundamental behavior you can exhibit when it comes to your 401(k) plan (or IRA, for that matter).
“By far,” says Scalici, “the most important decision a plan participant can make to influence how much they have in retirement is how much they contribute.”
No one can hold you back from contributing, from when you start to how much you save. This is the greatest key to success, and it’s all in your hands. And it has absolutely nothing to do with fees.
“Success comes with focusing on the things you can control,” says Mark Fonville, CEO and President at Covenant Wealth Advisors in Richmond, Virginia. “Regarding plan fees, participants pay those regardless. What they should concentrate on is creating good financial habits and making their savings automatic. I always tell people to ‘pay yourself first’ and make it automatic. This means that you should save toward retirement before you even get the chance to spend the money. If you make it automatic, this increases your odds of a successful retirement exponent regardless of fees.”
Part of the automatic is the free money. That’s right, most 401(k) plan sponsors will offer you an instant monetary reward that matches at least a portion of your contribution. Don’t underestimate the power of this. And it doesn’t rely on fees.
Stuart Robertson, CEO of ShareBuilder 401k in Seattle, Washington, says, “Automatically saving each paycheck for retirement and taking advantage of 401(k) high tax-deferred and/or Roth 401(k) contribution limits are big deals. Make sure you are investing enough and at least receiving the company match if offered. That’s free money.”
Nowhere are fees more misunderstood than in the area of investments. Granted, that’s perfectly understandable given there are so many different ways fees present themselves in this realm. Who can blame you if you can’t make heads or tails out of them?
The good news is that one study shows that investment decisions rank only fourth among the levers that guide your retirement destiny. (The top three are: when you start saving; how much you save; and, how long you save.)
If, in fact, it does come down to investments, many professionals see one critical factor that can trump fees.
“If plan participants only focus on one aspect of their 401(k) investments, that one aspect should be asset allocation every time,” says Whatley. “The asset allocation of your account determines the risk you are taking and in turn the growth and volatility you experience. Most plans offer target-date funds, which is a way to automate ensuring you are taking on more risk when you have more time until retirement and less risk as you approach your retirement date.”
In the end, you must focus primarily on where you want to be. Would you be willing to pay ten times more to virtually assure yourself of arriving at the right place, or are you willing to pay only half as much when you’ll only have half a chance to get there?
“Because there is very little that can be done about the fees that participants pay, the more important thing to do would be to focus on the returns produced in the past of the various plans offered,” says Josh Simpson, Vice President of Operations and Investment Adviser with Lake Advisory Group in Lady Lake, Florida. “But again, to get this information the employee will most likely need more information than just a website to go to in order to do their own research. Education needs to be provided because the average employee, even if they were to go to the website to do research, would possibly not know what they should be looking for.”
You can’t really do much about fees. Focus on the things you can do something about. But always keep in mind your destination.