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AARP Launches New Tool to Demystify 401(k) Fees

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Figuring out the 401(k) fees you’re really paying is one of the toughest things about managing your retirement accounts.  But because those fees can significantly eat into your returns, they’re important to understand. A new calculator from AARP can help.

Starting in 2012, U.S. Department of Labor rules will force 401(k) providers to give workers detailed breakdowns of fees deducted from their accounts. Many workers should start seeing the actual dollar amount deducted from their accounts on their statements, along with an explanation of what those fees are covering. But even that new disclosure could be tough to keep track of, as some service providers may bill the fees only once a year.

In the meantime, you can get a better feel for what you’re paying with a new calculator from AARP, the Washington, D.C., membership group for older Americans.

To use the calculator, click here. (Note: You will have to register on AARP’s website to access the free tool.) You’ll need to provide your age and annual salary, along with the name of your company and the plan. Next, you provide your current balance in each of your plan’s investments. With that information, the tool will calculate your approximate fees and tell you how they stack up.

And to demonstrate the long-term impact that high fees can have on your retirement savings, the tool estimates the impact, in dollars, that those fees could have on your retirement balance at age 65.

Let’s say you are 50 years old, make $100,000 a year and contribute the maximum $16,500 a year to your 401(k). If the average fees you’re paying are 1.32% a year, that’s 1% higher than the 0.32% average fee for a low-cost 401(k) investor, according to AARP’s calculator. At age 65, you would have an approximate retirement balance of $961,515 – or $119,039 less than the $1,080,554 you’d have if you were paying the average fee instead.

What can you do about it? The AARP tool suggests ways to cut costs, such as re-examining your plan to see if there are similar investment choices with lower fees – or asking your employer to consider adding investment options with lower fees.

If you’re at least 59 ½ years old, you could roll over money to an IRA. Even if you’re younger, some companies allow “in-service withdrawals.”

You’re way ahead of the game if you have a general awareness of such fees. Among the 803 401(k) plan participants interviewed for AARP in December, 71% incorrectly reported that they did not pay any fees, and 6% said that they did not know whether or not they pay any fees.

Have you tried to figure out whether the 401(k) fees you’re charged are relatively high or low? The experts predict that providing retirement investors with new information about fees on their account statements will help drive down costs. What do you think?

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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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