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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your retirement questions. My name is Mike Decker along with David Franson over here, and we're gonna be taking your questions. Just text them right now to (913) 363-1234, and we'll take them one at a time. Again, that number, (913) 363-1234. Let's begin.
David:Hey, Mike. I tried to calculate my $4.00 1 k fees, and it looks like I'm paying around 3%. Is that even possible? Okay. So for context, it is possible.
David:It's not common. Okay.
Mike:I do not want this question to get out of control. Most four zero one k plans, four zero three b's, I see anywhere from a half percent to one and a half percent, depending on how you calculate it. These smaller plans, like the solo four zero one k's or other ways, they can stack up in fees. And the smaller the plan is, the more the fees will probably be. Let me define how to properly calculate four zero one k fees.
David:Okay. Yeah. Let's do this.
Mike:Most people don't know how this works. Right. And when they figure it out, they typically get pretty upset. So when you look at your four zero one k, the first thing you need to do is look at the administrative costs. Don't get upset by them.
Mike:It is very difficult. It is very time intensive to manage the four zero one k with ERISA law, which I agree with ERISA law and how it's set up. It's helped to protect your money. That's its intention. But it takes time, and you gotta pay someone to do it, so the administration fees are there.
Mike:Now sometimes they're more reasonable, sometimes they're less reasonable, but look at that fee to understand that is coming out every year. K? Then you need to understand, is there an advisory fee? Sometimes there's like a 1% advisory fee for this adviser that maybe you've never even talked to, but you're paying them a fee to be on the plan. So understand not only the admin, but the advisory fees are on there, and then there's other miscellaneous fees as well.
Mike:So maybe your plan offers like an annuity option or other things like that. There can be additional fees tacked on depending on how the four zero one k, four zero three b, or whatever the plan is is structured, and the income or end of plan options that are available to you. So be very careful with that. Okay? And then there's a whole array of other fees that could be on there, but these fees typically you're looking at anywhere from, I don't know, half percent to one and a half, maybe up to 2% if you're a smaller plan, or whoever the company is that negotiated it just didn't do an aggressive job negotiating on these fees.
Mike:Maybe they're like, we don't wanna pay as much to the company, so our staff will basically just pay higher fees. That's a very normal thing that we see. The last set of fees are the most obscure. It is very common based on what I've seen where the fund options in your four zero one k aren't really options that you're gonna see in the public market. So when you see a lot of mutual funds that are out there, if you can't just publicly buy the same exact mutual fund with the same exact ticker, be suspicious.
Mike:They might say, well, this is the mutual fund version of the S and P 500. Well, it's like, why can't I buy that fund? Well, it's special for our four zero one k plans. When it's special for a four zero one k plan is, to me, that's a red flag saying, oh, so you've got higher fees baked in here, and I've got limited options, so I can't do much with it. Yikes.
Mike:So in those situations, these are called 12 b one fees. They're C share mutual funds that typically have, I mean, anywhere from a half a percent to 1%, maybe even more, but that's a fee you're paying every single year. So, yes, it is possible if constructed the wrong way to pay around two or 3% in your whatever employment compensation plan is. Is it common? No.
Mike:But you still need to know your fees.
David:Can you tell us how all these fees how do they, like, erode your savings or your balance or the value of your account?
Mike:Yeah. So you know how we talk about sequence of returns risk?
David:If you
Mike:don't know what that is, the sequence of the return matters. So let's say your account is up. Great. Your account's up, but then you just paid fees. So let's say the account's up 10%, or it should be with the market, you paid 3% fees, you only made 7%.
Mike:Mhmm. K? There's a compounding effect on that that can lead to a lot less money when you retire. And when I say a lot less, I mean significant less.
David:Like 6 figures less.
Mike:Yeah. Potentially. Layton, would you do just a quick favor and just say, let's put a 100,000 in at age 30 years old. K? And what the compounding difference would be if they had one, two, or 3% in fees.
Mike:And just as let's assume a 10% average growth on the portfolio, just to make really simple math. Just throw it in chat GPT, and and let's see what that does. Just we're doing this live real quick, and then we'll talk about that. But so that's that's one part of it is you're missing out on upside potential. Mhmm.
Mike:K? Now the second level is accentuating the losses. Those fees are coming out regardless of if you like it or not. So if the markets go down 10%, it takes an 11% return to break even, not the end of the world. But if the markets go down 30%, it would require a 43% return to break even.
Mike:So the deeper it goes down, the harder it is to recover. You with me so far? Yep. So the markets crash every seven or eight years. We know that.
Mike:If the markets go down, let's say, 3032%, somewhere around there, and you take out three or 4% in fees, you're now down, what, 34% or so? That's a 50% return to break even. Five zero. And you're paying fees on the way up as well, so it might take a couple of years just to recover. So fees, if they're high, can accentuate the losses more than low fees, but fees in general will accentuate losses because they're paid regardless of market conditions.
Mike:So roughly speaking, Leighton, if if we had, let's say, a 100,000 in there, I mean, 1% fees versus no fees, what would that roughly look like?
Layton:So 100,000 for forty years, and we do an average annual return of 8%. With no fees, you're gonna get roughly 2,000,000. But with 1% annual fee, you'll get a roughly 1,500,000.0. So the difference after forty years
Mike:Oh my.
Layton:Is $675,000.
Mike:K. Now let's go to 2% fees.
Layton:And the future value with 2% fees is you're barely breaking a million. That's a huge difference. So the difference is $1,140,000 over forty years, and eight percent's average. That's an average return.
Mike:8% is a very normal return to be in the market. I mean, the S and P 500 since 2000 to today has averaged around seven to 8% year over year. So if you went all in on equities and you ignored these target funds, these bond fund mixes, and all that, you just went straight S and P, which historically has had reasonable growth, these fees can really erode your retirement, and the greater the fee is. So here's the big takeaway. Know your fees.
Mike:If you have high fees in your portfolio, in your four one k specifically, you're gonna want to roll them over to an IRA probably, and then just buy the same thing and just hold it without fees, if that's your strategy. I am resolute in the opinion that the only reason why you would pay an adviser fees is to get a better performance had you not paid the fee. So a four zero one k plan that's paying 1% in fees for an adviser you never talked to makes no sense. When people pay us, which is a flat fee, it's not a percentage of the assets. When they pay us that flat fee, the expectation is the growth in the market that they experience over a longer term period of time, because we can't promise this year or the next six months.
Mike:Right? But over a multiyear bit that they were able to get more money out of their portfolio than had they done it on their own. That is the expectation. And all of the tax planning, all of the health care, the insurance planning, all of the estate assistance, and making sure that's all the all the other stuff that we do, which I think has probably more value in the overall situation, is icing on the cake because the money management that they're paying us to do has exceeded what they would have done on their own. So why in the world are we paying high four zero one k fees to an adviser that doesn't know you from Adam, that doesn't know your specific situation, that's not making tax planning advice.
Mike:They're just saying, oh, well, here's some funds. I like these funds. Great. Keep paying me 1%.
David:Would there be any situation where maybe you had to keep contributing to your four zero one k even regardless of the fees to, like, to get the match?
Mike:You can't roll over or remove your four zero one k until you separate employment or turn 59. And that's not even always the same situation, because sometimes, if you're especially if you're a teacher, you're an educator, you work for a hospital, many times those four zero three b's, you can't move until you retire. And so you're stuck paying these fees. At risk of making someone upset, I can't stand it. This part of URISSA law.
Mike:I love URISSA law. I think there's so much good in how they've structured the four zero one k to protect people. But to keep someone in a specific plan when they have no negotiating power over it, I think is pretty rough. I personally am partial to SEP IRAs, which is for a self employed plan, or a simple IRA, which is where you're working with a small small business, so a 100 employees or less, and operate off that because you've got more freedom, you've got more flexibility, you can move things around. It's just different.
Mike:And I know there are some four zero one k plans where you can do whatever you want in the market. There's brokerage links and things like that that you can buy ETFs, and that helps. But how many layers of fees are there you it is worth? What was it potentially, Layton? A million dollars of extra money?
Mike:$1,400,000 of potential extra money if you got ahead of this and negotiated differently. And maybe you don't get a match. And if you don't get a match, and you have, let's say, $10,000 to contribute, maybe instead of you putting into a four zero one k in that situation, you're deciding, hey. There's no match, so I might as well just do my IRA contributions and my Roth contributions for the year because you can put that into a system that has no fees. Fees matter.
Mike:So it is possible. I hope everyone listening in will do my homework that I'm gonna sign you right now, and that is just ask what the fees are. Call up your HR representative, your four zero one k administrator. They're wonderful people. They're happy to help, and say, you help me understand the fees?
Mike:And they'll probably break down the adviser fees, the admin fees, and all of that, but then dig deeper, and even ask if you need to ask Grock, ask Chat GPT saying, here is the mutual fund or the ETF that I'm investing. I can't find much on it. What are the fees roughly? They might be able to help you find something that you didn't know existed or how to look for it. They can walk you through that.
Mike:It's the beauty of AI is it overexposes everything. Yes. Fees matter. Sometimes some employer plans can be expensive. Look into it.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to ww.yourwealthanalysis.com today to learn more and get started.