Should I Invest in a 401k or Roth IRA?

Definitely get this question a LOT!!!! Should I invest in 401K and ROTH IRA? If you have a 401(k), IRA, 403(b) or similar retirement account, you are paying on average 1% to 2% a year in fees, studies show.

Does that seem like a little… or a lot? Most people think nothing of paying fees of a percent or two, but the fees charged in these accounts are a prime example of how compounding works against you. Let’s start with the fees charged by 401(k) plans…

If you have a 401(k), do you think you aren’t paying at least 1% a year in fees?

According to Brightscope, participants in small plans pay between 1.5% and 2% in fees annually, and participants in the very largest plans pay nearly 1% per year. If those fees sound like “small change” to you, then here’s a wake-up call: Fees of only 1% per year can slash the value of your savings by 28% over the next 35 years, according to the Department of Labor.

Brightscope also noted, “The sheer number of plans paying north of 2% a year in [401(k)] fees was shocking.

“What About IRA Fees?

While all the attention has been focused on the confiscatory fees you pay in a 401(k) plan, IRA fees have been ignored. Many people assume they’re very low. Hold on to your wallet, because a Government Accounting Office (GAO) report blew the roof off that myth! Have you ever left a job and rolled your 401(k) into an IRA? Millions of people do every year. Financial firms often encourage workers who are leaving a job to roll over their 401(k) assets into an IRA also managed by the firm, and many people do. However, this may be a bad move.

As recounted in the report, undercover investigators hired by the GAO called 30 of the largest 401(k) providers. Seven of these firms INCORRECTLY stated there were no fees to roll over a 401(k) into an IRA and no ongoing fees to maintain it. And half of the ten largest firms incorrectly advertised “free” IRAs on their websites. The fee information was scattered in tiny print in hard-to-find documents on the site.

The study found that one of the largest IRA providers charges an annual fee of 1.5% of assets for accounts with balances up to $500,000.

So, when you’re paying 1% to 2% in fees each year, how much of your account value does that devour over 35 years? This chart reveals the ugly truth. To keep it simple, we assumed you have a $100,000 account value growing at 7% a year:

Poof! There goes one-third to one-half of your retirement savings. I can assure you somebody is getting rich on this, but it’s not you!

If you are interested in learning more about how to save for your retirement with 0% in annual fees, contact 2STASH for more information.

Leave a Reply

Close Menu