5 Secrets You Didn't Know About 401(k)s
The average individual usually has a retirement plan. For those who do not have a private investment portfolio of some variation, there are employer-funded plans such as 401(k)s that help provide for their financial future. When it comes to a 401(k), there might be some secrets you are unaware of about those plans.
Smaller Companies have Higher Fees
Believe it or not, if you work for a smaller company, you are bound to face higher fees for maintenance on your 401(k) plan than those working for larger companies. Forbes notes that companies with a combined value in the 401(k) of $1 billion or more have administrative fees as low as $.29 per asset in the fund. Compare that to the $1.04 per asset administrative fees associated with plans that have $10 million or lower in total value of the fund.
Fees Add Up Fast
While fees might seem small when viewed in the short term, those fees can really add up over the years. For example, if you were to invest $25,000 for 30 years at a 0.35% rate, it would be worth $143,587.28, assuming a 6% annual return. In this case, you would pay $6,871.07 in annual operating fees, which leaves you with $136,716.21. Similarly, if you invested $25,000 for 30 years at a 0.94% rate, it would be worth the same amount from above at the end of the term. However, you would pay $16,560.15 in annual operating fees at the higher rate, leaving you with just $127,027.13 in comparison, for a total difference of $9,689.08.
If your employer does not match contributions to your account, you may want to review whether or not it is worthwhile to keep your funds in a 401(k) compared to other private investment vehicles. But remember, 401(k)s permit you to invest over three times as much as you can invest into an IRA.
You Can Borrow from Your 401(k)
If you find yourself in need of cash before your retirement, you might have the option of withdrawing from your 401(k) in the form of a loan. You will need to check with your plan administrator to determine the feasibility of doing so with your particular 401(k) account. However, it is important to be aware of the pitfalls of borrowing against your 401(k).
The money you borrow from your account must be repaid in regular installments over no longer than five years. If you fail to pay back your loan in time, the money you have removed can be considered as withdrawals. This would mean paying taxes plus the penalties of early withdrawal fees associated with 401(k) plans, which are based upon the income tax bracket you fall into each year. DailyWorth notes that these early withdrawal fees apply to accounts for individuals under the age of 59 1/2.
The Problem Might Be You
Sometimes the failure of your 401(k) to reach its potential is not based on the specific funds or even the managers, but the individual. If you are not saving enough money and contributing to your 401(k) on a regular basis, it is not likely to grow to its highest potential. Numerous studies have found that the highest balances were in the accounts of disciplined savers who managed to save an average of 14% of their annual pay, not including the company’s matching option. It has also been found that high-balance savers were not taking out loans against their 401(k) and kept most of their money in stock-related investments.
Self-Directed Options Normally Exist
Finally, it is worth being sure that your 401(k) has a self-directed option. Not all employers will allow you to put a portion of your 401(k) into an account that you manage on your own, or with assistance. These self-directed options give you the choice of investing in a wide range of lower cost investment types. It is up to you to investigate these options and determine their value. For further discussion about your 401(k), contact Paul Miller at Indian River Financial Group.