Skipping Your 401(k) Plan Could Yield Better Returns

Skipping Your 401(k) Plan Could Yield Better Returns

NEW YORK (MainStreet) — Investing with your company 401(k) plan can be a mistake and lead to lower returns because the fees are too excessive or the investment options are few and far in between and generate low yields.

Read More: Does Contributing to a 401(k) Lead to Better Health

Other company retirement plans simply have too many fees, which erode the principal amount, especially if the employer does not match contributions.

In the majority of plans, the employer absorbs the administration and other fees so the employee doesn't have to pay them, said Cal Brown, market manager for Savant Wealth Management in McLean, Virg.

What is common is the employee pays the expense ratio for the mutual fund. Any expense ratios over 1% fee against your returns are high, he said.

Read More Employees Are Too Complacent About Their 401(k) Plans

"Generally, if your mutual fund is an American large company stock fund, the expense ratio should be low," he said. "If it's a mutual fund investing in emerging markets, the expense ratio is high."

Employees wind up paying higher fees in new plans or ones that are smaller, said Bill Keen, CEO of Keen Wealth Advisors in Overland Park, Kan.

Read More: Workers Pocket More Cash With Lower 401(k) Fees

"New start-up 401(k) plans may not qualify for the lower expense structure that larger plans can enjoy," he said. "In some cases, these plans have investments with sales loads and high internal expenses."

Read More: Small Companies Have the Best-Performing 401(k) Plans

Employees should examine their mutual funds closely, because technically inferior fund options which are expensive or poor performers will affect your returns by 1% to 5% annually. Over a long period of time, compounding that poor return can cost you a lot of money, Brown said.

Back to Top