The Boost: Is your 401K expensive?

How many 401Ks have you had? If you’re like my wife and me, you’ve ended up with multiple 401Ks over the years. We’ve had seven in total. After leaving a job, we’d often forget about our old 401K for months, or even years. In fact, we recently discovered a 401K from over 10 years ago. While the funds were fully invested, we were paying hefty fees that hurt our returns.

🧠 What you need to know

Forgetting about a 401K isn’t crazy considering people switch jobs every few years. When they do, they often participate in a new 401K plan, given an employer match as well as overall tax-saving opportunities offered by retirement accounts.

Unfortunately, each new plan could be through a new provider. Let’s say your first job offered a 401K through Empower. Two years later you start a new job and contribute to a new 401K offered through Fidelity Net Benefits. Again, you switch jobs a couple of years later and now the new system is offered through Schwab. If you are young, you could find yourself with several more 401Ks through the years. In addition to remembering a lot of passwords, each 401K plan requires researching a unique set of investment options, which can vary significantly between providers. For example, below is a list of investment options in a Fidelity 401K:

401K investments can be incredibly valuable, so dig up all your 401Ks and make sure your funds are invested. Assuming annual market returns of 8% on average, a max 401K contribution of $22,500 would turn into over $225K in 30 years. By making the maximum contribution every year for 30 years and assuming the same annual returns, you could amass over $2.5 million in savings.

Potential lucrative savings

Instead of dealing with the complexity of having multiple separate 401Ks, you could consolidate them all in one place by rolling them over to a current 401K, IRA or Roth IRA. IRAs are offered by most major brokerage platforms and have some potentially significant benefits over a 401K:

Lower admin fees: 401K providers charge fees for administration of the plan and recordkeeping, among others. Depending upon the number of employees under your current or former employer’s 401K plan, the fees can vary, but they average around 1% per year. The smaller the company, the higher the fees. Find your 401K fees by looking at your plan information and compare the fees to potential IRA fees, many of which are free if you manage it independently. If you have $100K invested in a 401K plan today, assuming average market returns, the difference between a 0.25% fee and 1.00% fee over 30 years could amount to approximately $175K – that’s $175K in the pockets of the 401K administrator and investment platform, not yours.

Here’s a snapshot of what your fees may look like in your account’s transaction history. They may seem small, but they will add up before you know it.

Lower investment fees: While many 401K plans now have low-cost ETF and mutual fund options, it’s important to make sure you aren’t paying a high expense ratio.

Variety of investment options: An IRA allows you to invest in a significantly wider range of investments - essentially most of the stocks, bonds, ETFs, and mutual funds available in most brokerage accounts. 401Ks limit investment options because of regulatory requirements and to lower administrative cost.

The process for conducting a rollover is dependent on your 401K provider. Some are still old school and will send you a check, while others may facilitate a direct rollover where you can transfer the 401K funds directly to an IRA. If you have a Roth 401K, be sure to transfer the funds to a Roth IRA account to avoid taxes. There are platforms that can make the process easier, especially if you have multiple 401Ks.

🤝 How can Mezzi help?

If you decide to stick with your 401Ks rather than rolling them over, Mezzi can help monitor the asset allocation and performance across your various different 401Ks, all in one place. In fact, with our upcoming release, you can view all of your IRAs and 401Ks in one “Tax-advantaged” account bucket as if they were sitting in a single account. You can then evaluate if you have the desired allocation across the board. We offer integration support for many of the major 401K platforms, including Charles Schwab, Empower, E*Trade, Fidelity, Guideline, Vanguard, and more. Just connect your accounts to Mezzi to get started.