With Wall Street’s recent slide erasing more than 10% of the market’s value in two weeks, you’ve probably been tempted to peek at your 401(k) account.
Go ahead—but don’t look at your returns (or in this case, your losses). As scary as it may seem, this correction is a short-term blip. As long as you keep saving and investing, in two or three decades it won’t matter.
What you should do now is use this opportunity to check something more important: the fees you’re paying in your workplace retirement account, says Josh Robbins, chief strategy officer of America’s Best 401k (ABK).
Retirement plan fees are often overlooked — especially in good times, when the market is delivering double-digit returns — because they may seem minor at the time.
But even minor fees can wind up taking a big chunk out of your 401(k) over time. And the fact is, if you work at a typical company, there’s a good chance you’re paying more than just minor fees.
How Much Should You Be Paying in 401(k) fees?
If you’ve been reading the headlines, you’d get the impression that fees on 401(k) retirement plans have been falling in recent years.
To some extent, they have. Average record-keeping fees on company-sponsored retirement plans have fallen by more than 25% since 2006, while the average annual expense ratio on a 401(k) equity fund is down more than 35%.
But that’s based on large 401(k) plans run by some of the biggest corporations in the country.
That’s why “I get frustrated when I hear stories about how fees are coming down in 401(k) plans,” Robbins says, noting that 90% of the 401(k) plans in existence are run by companies with less than 100 employees.
Many of those small businesses don’t have the time, interest, expertise, or financial leverage to negotiate low fees for their employees.
ABK recently examined 401(k) fees at small companies, based on data from 11 of the largest 401(k) providers that work with smaller 401(k) plans. It found that in those plans, the average annual asset-based fee (including the costs of record-keeping, administration, and investment management) runs from around 1.2% a year to 2%.
In other words, for every $10,000 you invest, you may be losing $120 to $200 a year in fees.
What’s a more reasonable cost?
“I’d say anywhere between half a percent and on the high-end maybe three-quarters of one percent,” says Robbins.
That’s “all in” — which means the fees include all the costs charged not just by your plan provider, but by the underlying mutual funds you use as investment options within your 401(k).
What Can You Do About 401(k) Fees?
You may assume there’s not a lot you can do, because the terms of your 401(k) are set by your employer. At large corporations, there’s a dedicated employee benefit department you can lobby for improvements. And small 401(k) plans may be handled by the owner directly, so you may not feel comfortable complaining directly to the boss.
MONEY spoke with Robbins, whose firm designs, administers, and provides record-keeping for workplace retirement plans. (Robbins’ father, the author and speaker Tony Robbins, is also a partner in the company.) Here’s what he suggests.
Step 1: Accentuate the positive
Lobbying your boss to improve your 401(k) need not be an antagonistic exercise.
“Typically the person with the highest balance in your plan is the owner,” Robbins says. “I think it can be framed as a really cool positive thing instead of trying to hold the business owner over a barrel,” he says.
In fact, the recent market scare has already spurred a jump in business owners checking into their 401(k) plans and fees, says Tom Zgainer, CEO of America’s Best 401(k).
“It’s as though these business owners, who often have the largest balances in their plans and therefore have the most to lose, have been rudely awakened from a long period of enjoyable hibernation,” he says. “We all needed the wake-up call.”
Step 2: Pitch this as a cost-cutting idea — not an employee benefit
Robbins notes that his firm worked with a company where the owner routinely tasked employees to come up with creative cost-cutting ideas for the company.
If your employer does the same, “this might be another interesting way to frame it: You bring this as your cost-cutting idea for the company,” says Robbins, adding that lower 401(k) fees could end up saving the plan and its investors millions of dollars over the course of a career.
Step 3: At the very least, ask for index funds.
If you run into difficulties convincing your company to change 401(k) providers and lower costs, at the very least ask to get access to a few more low-cost index fund as investment choices in your plan.
The key in that sentence is “low”-cost index funds.
Robbins warns that even if index funds are added to a suite of investment options, some plans mark up management fees on those products. So stress that you want low-cost index funds.
Step 4: Be willing to use other tools
A 401(k) is a great investment tool, but only if the fees are reasonable. And truth be told, it’s not the only retirement account around.
How high is too high when it comes to fees?
“If your all-in plan fees are north of 2%, you’re in what I would call the realm of egregious,” Robbins says.
Now, if you have a really generous match on that high-fee plan, it’s worth taking advantage of the match and then taking your remaining contributions and using a Roth IRA instead.
But “if there’s not a match, it’s a no brainer,” he says. You’re better off going to a low-cost IRA provider and investing in really low-cost index funds than maxing out on a high-cost 401(k) with expensive investment options, he says.