The first thought I have when I hear 401(k) is that it's a great tool for retirement savings. The second isn't so positive, but it's a fact of investing and something we must pay attention to if we want to make the most of our savings. 401(k) accounts can be ridden with hidden fees that could eat up your retirement savings. I know it sounds extreme, but consider this: A 2006 study by Congress found that increasing fees by 1 percent reduces your 401(k) returns by about 17 percent.
In their example, if you invest $20,000 in a 401(k) that charges fees of 1.5 percent, over 20 years you end up with $58,000. But if the fees were .5 percent you would end up with $70,500. And if you have a 35 year time frame you should retire with $220,000, but fees would reduce that number to $163,000.
How is this possible? To find out just
Fees compound over the years, along with the growth of your investment. And while fees are an unavoidable part of investing, avoid paying more than you have to by doing your research. Don't choose mutual funds just because they have a familiar name or a hot track record. While some fees are out of your control, like administrative fees, you have some control over where your money is going and should try and cut investment costs as much as possible.
Aside from investment expenses and administrative fees, there can be hidden fees that we have no idea even exist. The good news is that there are reform proposals making their way around Washington, so hopefully our retirement savings will be better from hidden fees in the future.