Is Your 401(k) Leaking Money?

A 401(k) fund provides you with a great, tax-deferred way to save for retirement. But if you don't manage it correctly, there are plenty of mistakes you can make with the account. Some mistakes are obvious, such as early withdrawals which incur significant fees. But one of the worst 401(k) mistakes isn't so obvious, and you may not even know your fund is losing money unless you specifically check for it.

This mistake is called “fund fee loss” and a recent study demonstrated how serious and widespread the problem really is. Professors from Yale and the University of Virginia studied the menu options for a variety of 401(k) funds. They found that the options are indeed diverse, and offer investors a variety of opportunities for growth. But they also discovered that the fees associated with many of these options are so high that investors are losing a significant amount of their retirement income savings.

In fact, this fund fee loss is causing a 10.2 percent loss in optimal returns. Therefore a saver who is shooting for a one million dollar retirement goal will instead accumulate only 898,000, due to paying high fees and administrative costs.
The authors of the study advise savers to be on guard for the following fees:

• High expense ratios – the financial professionals managing your money will charge a certain percentage each year. Look for expense rations below 0.5 percent.
  
  
• Front-end loads – this is a fee that you must pay before you can invest with a fund . Unless you're absolutely sure you need to select a particular option, never pay this fee.
  
  
• Back-end loads – you pay this fee when you withdraw from a particular fund. Avoid funds with high back-end loads, unless you're sure you'll be invested in them for a long time. Otherwise you pay fees each time you pull out of a fund and switch to another one.
  
  No investment strategy works perfectly for everyone, all of the time. But if you're concerned about fund fee loss, talk to your financial professional about your options.
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