If that 401(k) runs through Fidelity, Schwab or Vanguard and offers low-cost target date funds, you're golden.
But what do you do if your company tabs the wrong administrator to handle your 401(k) plan?
What Should I Do If My Company 401(k) Plan Charges Too Many Fees?
My company moved from a low-cost 401(k) provider to an expensive insurance company. Should I withdraw my 401(k) funds and move them?
That’s what a listener recently asked Clark Howard.
Asked Jeff in Tennessee: "My company is moving our 401(k) administration from Charles Schwab to [an insurance company].
"I am not thrilled. Is my concern justified? Can/should I move my 401(k) to my own brokerage account? I have about $1,000,000 in my account and am 52 years old."
Remember, the right time to invest with an insurance company is never, never not ever. Plus, avoiding investment fees is one of the biggest keys to long-term wealth.
With $1 million in his 401(k), the fees are higher stakes for Jeff. A difference in fees of 1% equates to $10,000 per year — in addition to the decade-plus of growth in the market those dollars can accrue before he reaches retirement age.
Is there anything Jeff can do to prevent getting walloped in the retirement wallet?
“I don’t know why your employer would move your 401(k) from a low-cost provider like Schwab to an ultra-high-cost insurance company. And I hate this for you,” Clark says.
“You can’t overcome those extremely high costs that are usually found in an insurance company-administered 401(k). Insurance companies are the appropriate place to buy … insurance. They are not an appropriate choice for investments.”
High-Cost 401(k) Plan? Take These 4 Steps
Once he gets over the pain of converting to a high-cost plan administrator, Jeff can start figuring out his next steps.
1. Leave the $1 million where it is.
Unless you work for another company and currently have access to contribute to multiple 401(k) accounts, that money is more or less stuck.
At 52, you’ll get heavily taxed if you withdraw all that money. Plus, then you’ll need to put it into a taxable account.
You could consider an IRA rollover. But if you're taking a traditional 401(k) and rolling it into a Roth IRA, you'll face tax obligations that way as well.
2. Contribute enough to secure the company match.
Normally, Clark says, your total fees — administrative fees plus the expense ratios of the investments — shouldn't exceed 0.5% for a 401(k) plan.
You’ll almost certainly face total costs higher than that with an insurance company. Perhaps 1% or more.
But Jeff should contribute enough to his 401(k) to continue getting the match.
3. Think twice about investing in a target date fund.
If Clark has said it once, he’s said it 100 times. Target date funds are the easy button for retirement investing. Just put all your money into the target date fund labeled with the year closest to when you intend to retire and call it a day.
But if an insurance company oversees your 401(k), you have to think twice.
“The target retirement funds will have massive expense ratios. Huge. That will be like 25 to 50 times what they would be with one of the low-cost providers,” Clark says. “So if that is true in the plan, you don’t want to use that choice.
“Normally they will have low-cost index funds. And so you can build a portfolio of index funds that mimics pretty much the holdings you would have inside the target retirement fund.”
4. Consider investing in other places.
You may be able to make a 401(k) account with an insurance company work if the index fund investment options are cheap enough.
“Past that, if the insurance company-provided 401(k) is so lousy with such rotten, high expenses, it would make sense [beyond the company match] to do index funds in an investment account and give up the tax-sheltered growth of the 401(k) if the overall expenses are above 1%,” Clark says.
Here’s where your money should go next, if not into the 401(k):
- Start contributing to a Roth IRA with your excess dollars if you're income-eligible.
- Buy index funds in a taxable brokerage account.
Final Thoughts
It’s a real bummer when your employer allows an insurance company to oversee their retirement investment plans. Fees are a huge deal when it comes to building long-term wealth.
Grabbing the company match is important. Beyond that, be careful about blindly pushing your money into a target date fund inside an insurance-overseen 401(k) account due to high fees. And consider contributing only enough to the 401(k) to get the company match and not a dollar more.
Clark congratulated Jeff for a job well done so far.
“You are what Fidelity refers to as a 401(k) millionaire. We have a record number of people who have become millionaires not through owning their own business,” Clark says.
“Not through inheritance. But paycheck by paycheck, putting money in the 401(k). Investing it in things like the target date retirement choices in them. Or index funds. And developing real wealth.”
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