Starting July 1st of this year, new regulations will require that all 401(k) providers fully disclose the operating cost of their plans, including the administrative fees and the underlying investment fees. This disclosure of the fees being charged may come as a shock to the 72 million participants, who have $3 trillion invested nationwide.
Many individual investors have been operating under the false assumption that they weren’t paying any fees to participate in their 401(k) program. My experience shows that many investors are blind to the true costs of investing today. During interviews with new clients, I have been amazed to find out that people just don't know what they are being charged to invest.
401(k)s have not been immune to this lack of understanding. Fortunately for consumers, all will be revealed beginning with their 401(k)’s third-quarter reporting statement. People will now be able to calculate the cost of having this retirement account.
But I question whether this information will mean much to people. Will it help them truly understand the cost of having their 401(k)? There is no such thing as a free lunch when it comes to your money, as every investment you own has a cost. But consumers may not understand the impact of the fees on their portfolio’s net worth.
So how do these fees affect your 401(k)’s performance?
They can potentially have a very large impact on the future growth of your investment. Mathematically speaking, if you have a $10,000 portfolio growing at 9 percent for 30 years, an extra 1 percent in expenses can reduce your account by more than $26,000.* This is a significant difference and one that should not be ignored.
Hopefully now that there will be full disclosure of costs, participants will be able to make informed decisions about their retirement investments. This should also reinforce the benefits of working with a qualified adviser who can help consumers navigate this confusing world of fees and performance, and help them reach their desired retirement goals.
*This is a hypothetical example for illustration purposes only, and should not be deemed a representation of past or future results as actual results vary. The example does not represent any specific product; however, most investments generate fluctuating returns and an investor may incur a profit or loss. Seeking higher rate of return involves a great risk.
Joe Wirbick is the President of the Lancaster, PA financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.
Tax advice provided for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. Sequinox Financial and JWC/JRAG do not offer tax advice and are not affiliated. Mr. Wirbick is an Investment Advisor Representative offering advisory services through Jonathan Roberts Advisory Group and securities through J.W. Cole Financial, Inc. Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JRAG.