What to do when your 401(k) leaves something to be desired.

Chris Gentry is meticulous about his craft – he’s a professional woodworker at a small company in Brooklyn, NY, that makes custom dining and coffee tables, cabinets and interiors.

He does the pieces on his own from start to finish and enjoys that freedom. “It’s good to have control over how to do something,” he said.

Mr. Gentry, 36, is just as conscientious about saving for retirement. He has contributed the maximum allowable amount to his employer’s 401(k) plan over the past two years and has also topped up a Roth individual retirement account. He hopes to buy an apartment and start a family soon with his partner. “It looks like it’s all going to get expensive, so I’m trying to get an early start on retirement savings,” he said. Between the two accounts, he has managed to save $80,000.

His employer kicks 5 percent of his salary into a 401(k) regardless of how much Mr. Gentry contributes. But he is concerned about the plan’s high-cost mutual funds. “They’re expensive compared to what I can get in an IRA,” he said. He even wonders if he should contribute to the project at all. “I’m not sure how to determine when the fees become so expensive that the benefits of the 401(k) outweigh the fees.”

Fees are one of the most important factors in successful retirement investing. They determine how much money comes into your pocket after deductions from mutual funds and 401(k) plan providers. The cuts particularly hurt young workers, who face the risk that higher fees will add up over time.

“The fee is the compound that returns the compound,” said Scott Puritz. Managing Director at RebalanceA firm that often works with clients on 401(k) rollovers and advises companies on ways to improve their plans. “People are apathetic to differences, but it’s a big factor in long-term returns.”

Costs are usually much higher in projects sponsored by small businesses, such as the 10-person firm where Mr. Gentry works. His plan does not offer a low-cost passive index fund option. He is fully invested in a target date fund comprised of actively managed mutual funds that have outperformed the overall market over the past decade. The fund charges an annual expense fee of just over 1 percent.

That amount is typical for smaller plans, according to data compiled for the 401(k) Average Book, which surveys companies that offer plans to employers. For example, the survey found that in plans with 10 participants and $1 million in assets, the average cost of investment is 1.10 percent. At larger firms, those fees are much lower: Among companies with 1,000 to 5,000 plan participants, target date fund fees average just 0.33 percent, according to data compiled by the Investment Company Institute and BrightScope. (Target-date funds gradually shift from stocks to bonds as a worker approaches their expected retirement date.)

It is not unusual for smaller projects to incur much higher total costs. “We often see plans that charge 2 or 3 percent — sometimes more,” Mr. Piortz said.

One of the main reasons for the different amount of fees is the fixed costs of administering a plan and how those costs are spread across companies of different sizes. “If I have a small coffee shop plan with $100,000 in assets, the costs are spread over fewer people than a very large company,” said Joe Valletta, principal of Pension Data Source, which books 401(k) averages. publishes “A large project has higher fixed costs, but it’s spread over more employees and a larger asset base.”

Mr. Gentry is fortunate to work for an employer that offers any type of plan. About half of US private-sector workers are covered by an employer’s retirement plan at any given time, and the gap is driven by lower participation in the system by smaller employers. Center for Retirement Research at Boston College. Workers often gain and lose coverage as they change jobs.

The coverage gap helps explain why many workers reach retirement with savings that don’t last them the rest of their lives. According to Federal Reserve, Median retirement account holdings for workers ages 55 to 64 in 2022 were $185,000.

But fees also play an important role, especially for young workers who experience compounding effects over many years of saving. The difference in account balances at retirement can be staggering.

The New York Times worked with Rebalance to create a hypothetical example, illustrating the career-long impact of plans with different fee levels. We consider a 28-year-old worker with a starting salary of $75,000 who saves diligently in her 401(k) account throughout her career. She contributes 6 percent of her salary annually and receives a 3 percent matching contribution from her employer. This scenario shows the impact this would have on three possible retirement ages. At age 65, his portfolio is about 66 percent smaller in the highest-cost plan than in the lowest.

Determining the fees you pay is not easy. Fees may be charged for plan administration, investments and sometimes individual services provided to participants. All 401(k) plans are required to send an annual notice that explains the fees that can be deducted from your account, but understanding them is another matter.

“It’s very difficult for people to understand their fees unless they’re investment professionals, which are mostly retired,” said Lisa M. Gomez, assistant secretary for employee benefits protection at the U.S. Department of Labor. Picks up.

The Secure 2.0 legislation of 2022 directed the department to examine ways to improve plan information, including how to understand fees. It expects to report back to Congress with recommendations by the end of 2025, Ms. Gomez said. The department publishes a Guide to 401(k) Fees And there’s a toll-free line with counselors who can help participants understand their fees (866-444-3272).

But asking your employer about fees is a good starting point. “You have a right to know what you’re paying, so go to your human resources department, and ask them to tell you about your options and what they cost,” Rebalance’s managing director Mr. Pritz said. The Financial Industry Regulatory Authority offers a Online tool which analyzes how fees and other costs affect the value of mutual funds and exchange-traded funds over time.

If your employer’s plan offers an annual matching contribution, save enough to get it — otherwise doing so leaves money on the table. “If they’re matched dollar-for-dollar or 50 cents on the dollar, that’s a 100 percent or 50 percent return with almost zero risk,” said Heath Buller, a financial planner with Fiduciary Financial Advisors in Grand Rapids, Mich. .

Pay attention to your investment choices, and look for the least expensive options. If possible, find a low-cost index fund that tracks the entire stock market. “Although the investment menu includes high-expense funds, you can find an index fund or a good quality target date fund series,” said Christine Benz, director of personal finance and retirement planning at Morningstar.

You can also push for change. Smaller 401(k) plans may be better. Employers are generally sincere with a legal obligation to consider only the interests of participants, and it is in their own best interest to consider your concerns. “You can raise your concerns about high fees or poor investment options with your employer and ask if the company is willing to consider an adjustment,” Mr. Buller said.

After securing the employer match, consider low-cost options outside of your 401(k) for additional savings. This year, you can contribute up to $23,000 to a 401(k) and $7,000 to an IRA. Savers aged 50 and above can contribute more through catch-up contributions. Eligibility to Deduct IRA Contributions Phased in at certain income levels. Setting up a low-cost IRA lets you roll the balance into a single account as you change jobs throughout your career, which is a great way to stay organized.

If you have self-employment income other than wages, a Simplified Employee Pension IRA. or Solo 401(k) IRAs offer ways around contribution limits. Solo 401(k) accounts have higher contribution limits and are not available if you run a company with employees. Government reporting requirements differ between these two options.

Yulia Petrovsky, a financial planner in San Francisco, has many clients who work for large technology companies that also have side businesses. “Some of these startups are working,” he said. “Some have marketing or other consulting gigs, especially when between jobs, so these accounts can be a real slam dunk.”

Taxable investment accounts IRAs offer another way around contribution limits, especially for older retirement savers. Unlike 401(k) and IRA accounts, they don’t come with a pre-tax advantage. Investment gains are subject to capital gains rates, although these are more favorable than the ordinary income tax rates that apply to withdrawals from tax-deferred accounts.

Tax deferral is less important for older investors, who have less time to take advantage of the tax-deferred compounding available in such accounts than younger investors.

It is also possible to use tax-efficient investments in taxable accounts, such as broad market equity exchange-traded funds, which are highly tax-efficient, and municipal bonds – which are generally not subject to federal income tax – For fixed income, Ms. Benz added.

“It’s not that difficult to replicate some of the tax-sheltering features of a tax-deferred account in a taxable account,” he said.

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