A 401(k) can be an invaluable tool for retirement planning. These accounts allow you to save on a tax-advantaged basis, enjoying tax-deferred growth while potentially reaping the benefits of an employer matching contribution. According to Fidelity Investments, workers are increasingly using their 401(k)s to their advantage, with the average account balance climbing to a record high of $92,500 through the fourth quarter of 2016. (See 401(k) Balances Reach Record Highs.)

While saving in a 401(k) can lead to a more secure retirement, there’s one thing that could sabotage your efforts: high fees. Fees can erode the value of your account over time, making it vital to understand just how much you’re paying to maintain your investments.

401(k) Fees Continue to Go Down

According to independent consulting firm NEPC, fees for defined contribution plans, including 401(k)s, have edged down a notch in recent years. The average expense ratio fell to 0.41% of assets this year, continuing a streak of three straight years of declines. Fees related to investment management, recordkeeping and trust and custody services held steady at 0.43%, the same as 2016 levels. The median record-keeping fee per participant came to $59, a slight increase over the $57 reported in 2016. That’s still only half the $118 median reported in 2006, however.

Additional research from Brightscope supports the overall downward trend in 401(k) fees. Data released in 2016 showed that in 2014, the average participant was in a plan with a total expense ratio of 0.55%. At the best and worst ends of the scale, 10% of plans had a total cost of 0.47% or less, while 10% had a total plan cost of 1.50% or more. The research also showed that the gap in cost tends to decrease as plan size increases. In other words, the more assets held in the plan, the less investors pay in fees.

Fees for mutual funds held within 401(k)s, in particular, have seen a sizable drop in fees. In 2000, for example, the average expense ratio for equity mutual funds was 1.60%. By 2015, it had fallen to 1.31%. Overall, the asset-weighted industry average expense ratio was 0.68% in 2015, while the asset-weighted average 401(k) expense ratio was lower, at 0.53%. (See How to Know If Your 401(k) Plan Fees Are Too High.)

Keeping 401(k) Fees in Check

Understanding the fees you’re paying in your 401(k) is essential to your long-term retirement security, but 92% of Americans are clueless about the cost, according to NerdWallet. Over a lifetime, the total returns lost to fees can be staggering. A NerdWallet study found that Millennial workers may sacrifice $590,000 in returns over the course of a 40-year career by paying just 1% in fees. Increasing your contribution amount could help to cover some of that shortfall, but it may not account for all of it.

There are several things you can do to keep fees from wreaking havoc with your retirement. First, review your investments to see what you’re actually paying. Then, compare that against the returns those investments are generating. If, for example, you’re investing in actively managed funds that cost more than some other options, ask yourself whether the returns justify the higher fees.

Also, take care to consider how convenience and cost compare. Target-date funds, for example, are a popular choice among investors who desire a set-it-and-forget-it approach, but they can also come with a higher expense ratio.

Next, break down individual fees associated with your 401(k), including the plan administration fees, which cover recordkeeping and accounting, as well as the various service fees you may be charged for things like auto-escalation of your contributions. Also, look for any hidden or undisclosed costs that your account statement or plan prospectus doesn’t make clear. If you’re not sure where to find this information, your plan administrator should be able to point you in the right direction. (See also 401(k) Auto-Enrollment: The Best Savings Plan.)

Once you have an idea of how much of your earnings is going to fees, you can begin making adjustments in your portfolio, such as moving in or out of specific investments. If your plan allows it, you could consider a self-directed investment option, which might let you take advantage of lower-cost funds.

And be strategic about managing your maximum contributions: Once you’ve done all you can to reduce fees in your employer’s plan – and have invested to the maximum to get your employer matching funds, if any – you can consider investing in an individual retirement account (IRA). It may offer a broader range of low-fee index funds or exchange-traded funds. Once you've maximized your annual IRA contributions, you can consider investing any other available money back in your 401(k) until you've contributed as much as the IRS allows in that investment as well.

The Bottom Line

Fees can be your worst enemy when trying to maximize your 401(k). While fees continue to decline, it’s still important to know where your plan stands and how much you’re paying. The sooner you move to counteract the effects of those fees, the better, as you focus on your long-term retirement outlook.

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