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401(k) plans provide the convenience of having money withheld from your paycheck automatically so you don’t have to take action to save every month. You also get an immediate tax deduction for your contributions. (GETTY IMAGES)


Take advantage of tax breaks and employer contributions while also minimizing fees.

The fees you pay within your retirement account reduce your investment returns and could cost you tens of thousands of dollars over the course of your career. While you can’t always avoid 401(k) fees, there are some ways to minimize fees and limit the impact on your nest egg.

401(k) fees to watch out for include:

  • Administration fees.
  • Management fees.
  • Sales charges.
  • Investment fees.
  • Service fees.

Here are some strategies to cope with high fees in your 401(k) plan.

Check Out Your 401(k) Fee Disclosure Statement

Your 401(k) plan is required to send you a fee disclosure statement each year. This document lists key pieces of information about every investment option in your 401(k) plan, including the annual gross expense ratio of each fund listed as a percentage of the account balance and the dollar value of the fee for each $1,000 invested in the fund.

The statement will also list additional fees associated with each fund or charges you might incur if you take specific actions. “Watch out for those funds that carry commission loads,” says Michael Solari, a certified financial planner for Solari Financial Planning in Boston. “Those carry commissions can lop off as much as 6% of every contribution.” Your 401(k) fee disclosure statement allows you to quickly determine how much each fund costs to own and if there is a similar lower-cost fund available in the plan.

Compare the Cost of Each Fund

A workplace 401(k) plan offers a limited menu of investment options. Often, some of the funds cost significantly less than others, even within the same investment class.

“One way to compare the costs of each fund is to look for the expense ratio for the fund,” says Kim Hall, a certified financial planner for Clarity Wealth Development in Corvallis, Oregon. “The lower the expense ratio, the less those costs are eating into your investment returns.”

Factor in the 401(k) Match

If your 401(k) plan contains only high-cost funds, there’s a temptation to avoid the account altogether, but that could be a mistake. If your employer provides a 401(k) match, you are unlikely to beat that return on an investment within another type of account.

“No matter what you should be contributing the maximum for the match,” says Eric Gabor, a certified financial planner and founder of Eagle Grove Advisors in Jersey City, New Jersey. “If it’s a dollar-for-dollar match, that’s a 100% return. You are not going to get that anywhere else.”

Consider the Tax Break

401(k) plans provide the convenience of having money withheld from your paycheck automatically so you don’t have to take action to save every month. You also get an immediate tax deduction for your contributions. The money you deposit in the 401(k) is withheld from your pay on a pretax basis. For example, if you’re in the 24% tax bracket, for every $200 withheld from your paychecks and deposited in the 401(k) plan, your tax bill declines by $48. Remember to factor in this tax break before deciding to skip the 401(k) plan.

Save in an IRA

Once you get the 401(k) match, you might be able to minimize fees and earn a similar tax break by further saving for retirement in an individual retirement account. “Sometimes 401(k)s only have limited investment options that have high internal costs,” Hall says. “If you do not have an employer match, or have contributions that go beyond the employer match, another option would be to open a traditional IRA that offers lower-cost investment options and funnel your retirement savings there.”

If your modified adjusted gross income is less than $66,000 as an individual or $105,000 as part of a married couple, you can claim a tax deduction on up to $6,000 that you contribute to a traditional IRA in 2021, or $7,000 if you are age 50 or older. The tax deduction is gradually phased out for employees who are eligible for a 401(k) plan at work and earn up to $76,000 as an individual or $125,000 as a couple. Workers who earn more than this amount and are employed at a company with a 401(k) plan aren’t eligible for a tax deduction on their IRA contributions.

Diversify With a Roth IRA

Another option for saving outside your 401(k) plan after you get the match is in a Roth IRA. Roth IRAs have higher income limits, and the ability to make a contribution doesn’t phase out until your adjusted gross income reaches $125,000 to $140,000 for individuals and $198,000 to $208,000 for married couples.

Roth IRAs have the same contribution limits as traditional IRAs, but the tax treatment is different. There’s no tax deduction for the money you deposit in a Roth IRA, but the money grows without being taxed and withdrawals in retirement from accounts at least five years old are tax-free.

Ask for Better Options

If all the funds in your 401(k) plan charge fees higher than 1%, it could be worth contacting your human resources department and pointing out that there are much lower-cost funds available that would make a great addition to the 401(k) plan.

“Raise the question and ask why we don’t have lower cost ETFs and mutual funds in the 401(k) menu of investment options,” Gabor says. “I think a fair request would be to have an index-based fund for each asset class offered. Index funds typically have the lowest cost fees.”

Reduce Your Tax Bill by Saving for Retirement

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Updated on July 26, 2021: This story was published at an earlier date and has been updated with new information.

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