In the business world, the 401k retirement investment is the choice for many employers.
401K plans are good instruments for ‘forced saving’ that help employees build up a retirement nest egg over time. 401K plans also limit the employers liability for the long term. It's a win-win for employees and employers.
The employer invests a specific amount into your account each pay... their liability is limited to that amount so they can calculate budgets easily. Often the employee contributes too. This is also called a Defined Contribution Pension Plan.
This is the opposite of a Defined Benefit Pension Plan... where the employer contributes whatever is necessary to fund the plan.
Fees can eat up your 401k savings; if you have a choice (and many of us still working don’t, unfortunately) you might want to shop around to see if there’s a better place to park that money.
While many of us think that our 401K retirement plan is another benefit provided at no or little cost to ourselves, beware that 401Ks have fees and other charges – most of which are paid for by the participant (that’s us – not the employer.)
In a recent study, it was found that in a whopping 83% of 401K plans, the participants bore the brunt of the fees, with employers covering a mere 13%, and the plans covering 4%. Because these charges are directly deducted from the account, it’s not easy to determine how much or even whether the participant pays.
What kinds of fees are associated with 401k plans? Here are several kinds of investment, administrative, recordkeeping and other services that are needed to help the plans run more smoothly:
The consulting firm Deloitte recently published an excellent survey/study of 401k fees. Click on the link for the PDF version.
IF you’re considering withdrawal before age 59 l/2, read about 401-K early withdrawals.