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What to Do If Your 401(k) Plan Has High Fees

By U.S. News & World Report

The fees you pay within your retirement account reduce your investment returns and could cost you tens of thousands of dollars over the course of your career. While you can’t always avoid 401(k) fees, there are some ways to minimize fees and limit the impact on your nest egg. Here are some strategies to cope with high fees in your 401(k) plan.

[See: How to Avoid 401(k) Fees and Penalties.]

Compare the cost of each fund. A workplace 401(k) plan offers a limited menu of investment options. Often, some of the funds cost significantly less than others, even within the same investment class. “You want to know what your costs are, and if costs are a driving factor, you can proactively choose the lower cost options, assuming there are some,” says Christopher McLaren, a certified financial planner for Conscious Life Planning in Cincinnati.

Check out your 401(k) fee disclosure statement. Your 401(k) plan is required to send you a fee disclosure statement each year. This document lists key pieces of information about every investment option in your 401(k) plan, including the annual gross expense ratio of each fund listed as a percentage of the account balance and the dollar value of the fee for each $1,000 invested in the fund. The statement will also list additional fees associated with each fund or charges you might incur if you take specific actions. “Watch out for those funds that carry commission loads,” says Michael Solari, a certified financial planner and principal of Solari Financial Planning in Boston. “Those carry commissions can lop off as much as 6 percent of every contribution.” Your 401(k) fee disclosure statement allows you to quickly determine how much each fund costs to own and if there is a similar lower cost fund available in the plan.

Factor in the 401(k) match. If your 401(k) plan contains only high-cost funds, there’s a temptation to avoid the account altogether, but that could be a mistake. If your employer provides a 401(k) match, you are unlikely to beat that return on an investment within another type of account. “No matter what you should be contributing the maximum for the match,” says Eric Gabor, a certified financial planner and founder of Eagle Grove Advisors in New York. “If it’s a dollar-for-dollar match, that’s a 100 percent return. You are not going to get that anywhere else.”

[See: Seldom-Used Features of 401(k) Plans.]

Consider the tax break. 401(k) plans provide the convenience of having money withheld from your paycheck automatically so you don’t have to take action to save every month. You also get an immediate tax deduction for your contributions. The money you deposit in the 401(k) is withheld from your pay on a pretax basis. For example, if you’re in the 25 percent tax bracket, for every $200 withheld from your paychecks and deposited in the 401(k) plan, your tax bill declines by $50. Remember to factor in this tax break before deciding to skip the 401(k) plan.

Save in an IRA. Once you get the 401(k) match, you might be able to minimize fees and earn a similar tax break by further saving for retirement in an IRA. If your modified adjusted gross income is less than $61,000 as an individual or $98,000 as part of a married couple, you can claim a tax deduction on up to $5,500 that you contribute to a traditional IRA in 2016, or $6,500 if you are age 50 or older. “You’ve got a much smaller allowed contribution to an IRA than you do for a 401(k),” McLaren says. The tax deduction is gradually phased out for employees who are eligible for a 401(k) plan at work and earn up to $71,000 as an individual or $118,000 as a couple. Workers who earn more than this amount and are employed at a company with a 401(k) plan aren’t eligible for a tax deduction on their IRA contributions.

Diversify with a Roth IRA. Another option for saving outside your 401(k) plan after you get the match is in a Roth IRA. Roth IRAs have higher income limits, and the ability to make a contribution doesn’t phase out until your adjusted gross income reaches $117,000 to $132,000 for individuals and $184,000 to $194,000 for married couples. Roth IRAs have the same contribution limits as traditional IRAs, but the tax treatment is different. There’s no tax deduction for the money you deposit in a Roth IRA, but the money grows without being taxed and withdrawals in retirement from accounts at least five years old are tax-free.

Get ready for new fiduciary rules. Beginning in April 2017, any advisor who makes investment recommendations to 401(k) plan sponsors or participants will be considered a fiduciary, which means they will be legally required to recommend investments in the client’s best interest. While advisors will be permitted to recommend that clients continue to follow their existing investment lineup, any new advice must benefit the client and the compensation for the advisor must be reasonable, according to new Department of Labor rules. “There’s going to be increased scrutiny from the regulatory organizations as well as increased competition,” McLaren says.

[See: How to Reduce Your Tax Bill by Saving for Retirement.]

Politely ask for better options. If all the funds in your 401(k) plan charge fees higher than 1 percent, it could be worth contacting your human resources department and pointing out that there are much lower cost funds available that would make a great addition to the 401(k) plan. “Raise the question and ask why we don’t have lower cost ETFs and mutual funds in the 401(k) menu of investment options,” Gabor says. “I think a fair request would be to have an index-based fund for each asset class offered. Index funds typically have the lowest cost fees.”

Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”

More from U.S. News

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How to Save for Retirement on Less Than $40,000 Per Year

Retirement Savings Tax Breaks for High Earners

What to Do If Your 401(k) Plan Has High Fees originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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