401(k) plans are a common way that many Americans use to plan their retirement nest egg. You are probably one of the millions of people who are using a 401(k) as part of your retirement plan. In fact, you might have most of your retirement fund squirreled away in a 401(k) plan.
According to the Investment Company Institute, 58 million Americans participated actively in a 401(k) plan in 2018. That equates to billions of American dollars saved in these ordinary retirement accounts.
Tip: Check out Blooom which will give you a free analysis of your investments in your 401k.
Although many of us put our hard earned money into these accounts, most of us are not completely up to date on the average returns. Knowing more about your 401(k) account can help you plan for retirement more effectively. In this article, we will be taking a closer look at 401(k) returns.
Table of Contents
- How do employer-sponsored 401ks work?
- Why do so many people sign up for a 401(k) plan?
- Average 401k Plan Returns
- Is the Average 401k Plan Return Higher if Actively Managed?
- Why are Average 401k Returns Often Lower Than Expected?
- What Kind of Fees am I Paying?
- So What Should You Do About These Hidden Fees?
- Why Should You Learn More About Your 401k Plans?
How do employer-sponsored 401ks work?
Employers generally offer a 401(k) plan as a part of their employee benefits package. Most companies even have an auto-enrollment program that is easy to opt into as an employee. It is especially easy to opt in if you know that you want to retire one day.
Since it is so easy to sign up, almost everyone accepts the 401(k) option. You usually can set up the percentage of your paycheck you would like to contribute.
How much should you be contributing? It is possible that your company provides a match incentive. If you are employed by a company that matches your 401(k) contributions, then you should at least put in the amount that your employer will match. Match money is free money. We all love free money!
After you decide on a percentage, the payments go to the 401(k) without entering your bank account. The ease of the process makes it easy to save for retirement without thinking about it too much. The automatic aspect of the 401(k) saving plan is great because it almost forces you to save money. I know that it is more difficult for me to save money when it is already in my regular checking account. As they say, out of sight out of mind.
Why do so many people sign up for a 401(k) plan?
Many people simply sign up for the standard 401(k) offered by their employer and then never think about it again. As with many things that concern your financial future, it can be really easy to just set something up and then proceed to forget about it.
I totally get that! I am guilty of letting my 401(k) sit with the original settings for too long. Plus, life is short, hectic, and you want to enjoy your time without worrying about money too much.
However, your future self will thank you later for forcing yourself to set up a solid financial foundation for your future. It really will not take too much additional time to maximize your 401(k) returns.
The reasons you might be tempted to just leave your 401(k) alone could include a lack of financial literacy, a trust in the standard settings to work out for the best or a fear of the stock market. It is crucial that you overcome this fears and take a closer look at your 401(k). Making a few minor adjustments could help you retire with more money in the bank.
For all of the money that you have invested in your 401(k) plan, do you know how well your plan is actually performing? Let’s take a look at the current average returns.
Average 401k Plan Returns
With so many American invested in a 401(k) plan, we would hope that the average returns of a 401(k) plan were higher than the market average.
Unfortunately, this is not the case.
According to a 2016 study from Motley Fool, the average 401(k) return in 2015 was -.4%. That is an appallingly low number for those of us trying to work our way towards retirement.
You might be looking at these numbers and thinking “How will I ever make it to retirement with returns like the -.4% in 2015?”
Well, never fear: 2019 was a completely different story. With the help of the S&P seeing a 31.5% return in 2019, 401k balances rose by a record 17%.
And that’s the thing about investing: one year can be extraordinarily low in returns, while another can be extraordinarily high in returns.
Taking that fact into account, Investopedia tells us that the average rate of return on a 401k hovers between 5% and 8%.
While a 5%-8%% rate of return is a much higher number than -.4%, the difference between those two numbers (and the 2015/2019 numbers) is startling. What kind of return should we expect over the course of our retirement saving years? Traditionally, retirement planners use an average growth rate of 5% each year for 401(k) plans.
Why are they using the low end of Investopedia’s ROI range?
Why you should be cautious with estimates
Typically, it would be better to err on the side of caution when it comes to your retirement plans. It would be brutal to run out of money and be forced to come back to work in your old age.
If you don’ t think that retirees ever have to go back to work, then you are wrong. About one-third of retirees return to work on a full-time or part-time basis according to the Federal Reserve Board. Hopefully you won’t be one of them!
The low rate of return may have scared you, but have no fear there are a few ways that you can maximize the rate of return for your 401(k).
Is the Average 401k Plan Return Higher if Actively Managed?
One might logically assume that if you take a more active roll in your 401(k) account, then your returns will increase. The opposite of this logic appears to be true, an actively managed plan actually seems to be outperformed by passively managed 401(k) plans.
Although actively managed funds can outperform passively managed funds on a year to year basis, it is very unlikely that an actively managed fund can consistently outperform a passively managed fund. Remember, the actively managed fund would need to outperform the passively managed fund over the course of multiple years and decades.
Since you will likely be saving for retirement for multiple decades, the passively managed fund seems like the better option.
You might get lucky if you choose to actively manage your account, but growth will be more predictable through a passively managed plan. Unless you feel comfortable working in the realm of less predictable gains, then it is probably better to stick to a passively managed 401(k) plan.
Why are Average 401k Returns Often Lower Than Expected?
A key factor to the low returns on a 401(k) is the percentage of fees associated with the plan. Yes, the number of fees attached to your plan your be what is causing such a dismal performance.
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It might sound crazy, but the fees associated with your 401(k) can have a tremendous impact on your future. In a recent SEC report, an example with a portfolio of $100,000 and a difference in fees of only .75% caused a gap of $30,000 over the course of a 20 year investment period. $30,000 could impact your retirement date significantly!
Now think about the fact that you might have a larger investment portfolio, a larger time frame to invest, or an even larger percentage of fees! You could be missing out on thousands of dollars or even hundreds of thousands of dollars that should be safe in your retirement account.
In fact, just a 1% fee reduction could help to add 10 additional years to your retirement income! It is worth paying attention to the hidden fees! Simply making an effort to reduce your fees could significantly increase the growth of your 401(k) accounts.
The effect fees have on returns
You might not be convinced that fees are really going to have an impact on your retirement fund, but they will. You may not notice the fees as they slowly chip away at your retirement savings.
Before you realize what’s happening, you might have already lost out on thousands of dollars. The key to stopping this pervasive problem is finding the fees early and eliminating them.
What Kind of Fees am I Paying?
The weight of hidden fees is likely having a huge impact on your 401(k)’s growth. You may have signed up without looking at all of the fine print, but there are a variety of different types of fees that may be leeching money and overall growth out of your 401(k) plans.
Some of the hidden fees you might find attached to your plan include basic things like administration fees, individual service fees, and investment fees. There are some more creatively sneaky plans that include sales charges, 12b-1 fees and a variety of others depending on which mutual fund you decide to invest your money in.
If you remember college, it might feel like you are back in school with the way some of these plans try to nickel and dime you. It feels like the last leg of senior year when everything had a fee attached like graduation fees, wellness fees, certification fees, the list just never ended. In fact, I even had to pay a fee to collect my diploma, as if 4 years and thousands of dollars was not enough.
As a 22-year-old, I felt helpless to the overwhelming amount of fees back then. I just assumed that the fees were just how the world worked. However, there are ways to help reduce the burden of fees on your retirement plans.
So What Should You Do About These Hidden Fees?
Now that you know there are fees hidden everywhere, what can you do about the problem?
First, you need to know what you are up against. How many fees are actually associated with your 401(k) plan? Some 401(k) plans have more fees than others, but I am willing to bet that your 401(k) plan has at least some fees attached because leech-like fees are hiding everywhere.
You may think that your 401(k) plan does not have any fees attached. Although you are not alone in this assumption, it is just not true. In fact, according to CNBC, you would be one of the 67% of Americans that believe that there are no fees associated with their 401(k) plan. It is just not likely that your 401(k) does not have any fees attached.
Believing there are no fees associated with your 401(k) plan is similar to believing that a bike would work without the pedals. As much as we might wish it could true, it just is not going to happen.
You will be shocked by the amount you can save, simply by minimizing your fees.
You might be able to save yourself thousands of dollars simply by adjusting your plan to reduce the fees.
All of this fee slashing sounds amazing, right? But how do you know that it will be worth it for you to adjust your plan? Plus, what plans should you switch to save yourself a mountain of money in fees?
The answers to those questions will vary based on your situation. It can be hard to know where to start if you are looking to slash fees any way you can, but there was a free tool called Blooom created just for this! It will help analyze the cost of your fees and find ways to cut through the fees.
Tools to help with fees
So if you aren’t sure how to analyze the long-term cost of your current fees, then I highly recommend that you check out Blooom. The company offers a free fee analyzer tool that will help you to see the true cost of the fees associated with your 401(k) account (or accounts).
The helpful outputs will help you to easily understand just how much your fees are costing you. It will likely surprise you to find out just how much the bloodsucking fees wanted to take from your retirement.
To be honest, it might make you a little bit angry that no one told you about these fees before. Unfortunately, you cannot turn back the clock but you can change the details of your plans to minimize the fees associated with your 401(k).
The reduction of fees is a guaranteed way to help your 401(k) return increase. Although you cannot control many other factors that contribute to the growth of your 401(k), cutting back fees is one controllable aspect of your retirement account.
Eliminating fees will help your account to give you better returns because fewer fees mean more money in your retirement accounts.
How to sign up with Blooom
It is super simple to sign up with Blooom. You just have to go through four steps that will only take a couple of minutes. If spending a few minutes working through Blooom sounds like it is not worth it, then just remember that the time you spend with Blooom could potentially help add years to your retirement!
First, you have to answer some basic questions about your age, goals, etc. Next, create a password to secure your information.
Then log in to your 401(k) accounts. You can connect multiple types of accounts to the Blooom analysis. in addition to a 401(k), you can also add a 401(a), 403(b), 457 or a TSP.
Finally, watch the tool analyze your fees. This last part is the easiest, you just have to wait a couple of seconds while their tool does all of the work.
What Should You Do with the Result of the Analysis?
The program will break down all of the investments and fees that are a part of your existing plan. After that, Blooom will offer some recommendations on how to improve your 401(k) account to meet your wants and needs. You can implement these suggestions yourself or work with Bloom to put these suggestions in place.
The analysis and advice are absolutely free and you are under no obligation to work with Bloom after using their tool. I highly recommend using this free tool to take a closer look at the fees associated with your 401(k) plan. You might be surprised how much you could be saving in fees.
If you happen to be very lucky and have a low percentage of fees already, then you might not have to make too many adjustments. However, you will rest easier once you have that knowledge.
There is really no reason why we should not all use Blooom to help eliminate 401(k) fees. Can any of us honestly say that we enjoy paying fees when that money could be helping us to reach retirement goals sooner? I definitely cannot and if you are still reading this then I doubt you want to give away your money to fees.
Why Should You Learn More About Your 401k Plans?
It is extremely important to be knowledgeable about your retirement plans and accounts. If you are not already familiar with the details of your 401(k) plan, then now is the time to educate yourself.
In addition to learning more about your 401(k) plan, take a closer look at the other retirement planning tools that you have in place. You may have a variety of other investments that are intended to fund your retirement including older 401(k) and IRAs.
Make sure that these accounts are also being maximized by reducing the fees and checking out the other fine print. It is very possible that you could improve your return rate in these areas too.
Fee slashing is a great way to help improve the health of your retirement accounts, but the most important aspect of your plan should be your accumulation of financial knowledge.
The Importance of Financial Literacy
Financial literacy cannot be understated. The more you know the more effective you will be when it comes to planning a solid financial future.
You may think that learning about personal finance will not help you out in the end, but education has proven to help improve 401(k) performance.
A 2010 study showed that individuals with financial literacy had a higher average return on their 401(k) plans than less financially literate individuals. Financially literate individuals received an average return of over 1% higher. As we showed with the fees, 1% can make a huge difference in your retirement savings!
You will be saving for retirement over the course of 25 or 30 years, imagine the amount of money you can save with the combined efforts of fee slashing and a basic knowledge about your finances.
The difference could make a huge impact on your life! It is worth investing the time and energy to accumulate knowledge and create a strong financial future for yourself and your family.
How to Improve Your Financial Literacy
The idea of becoming financially literate may sound daunting, but it is much easier than you think. Just start with learning the basics. The resources to learn are already available; you just need to set aside some time to use them.
You do not need to become an expert on personal finance but you need to learn to utilize the tools available to build the best possible future for yourself.
One of the first tools you should check out it Blooom. Use their free analysis and advice to start cutting away the hidden fees that you might not otherwise be able to find. Remember, many of these huge investment companies are looking to build profitable businesses for themselves.
The fees they charge you will help them to reach their goals, but it will not help you reach your goals. Only you are responsible for building your best financial future. Look out for your best interests and do not fall prey to hidden fees that will literally steal your future away without you even noticing.
Related Post: Roth IRA vs. 401k: Which is Right For You?
All this advice might seem overwhelming, but the plus side is that you are already on the right track. By simply reading this article, you have shown to yourself that you do care about your financial future. Since you care about your future, you are willing to put some time into learning the important basics of finance.
Learning about money may not seem to be the most glamorous way to spend your time. We all have busy lives, but keep making an effort to improve your financial literacy.
You might be able to completely transform your financial future for the better by simply improving your basic finance skills. So keep improving your knowledge and put what you learn into action.
Then, stay the course. Invest for the long haul and try to manage the ups and downs of the market wisely.
You can and will succeed in creating a long and happy retirement.