Chapter Three

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Know Your 401(k) Fees

What You Don’t Know Can Hurt You

George and Jane were very much in love and they married in their 30’s. Back then, they
both shared the same interests, the same expensive taste in clothes and a definite yearning
for the good things in life. When they were married, they planned on spending their
retirement traveling together around the world, so they knew they needed to put money
aside for their future. At nearly 63, they are far short of their financial goal, still hoping to be
able to save up enough to be able to live their retirement years in some degree of comfort.
Where did they go wrong? Although they liked the finer things in life, they also knew it was
important to save for retirement, so each established a retirement account through their
respective employers. They’d planned on waiting to have kids until sometime around 35
years old, and their second child was born when they were in their late 30’s. They were
diligent about contributing to their retirement accounts, and had hoped to retire by 65 years
of age, but with the added expense of two children and their college costs, that seemed out
of reach. They delayed retiring till they were at least 70 years old, figuring the added 5 years
would substantially increase their nest egg. But as it turned out, somehow, their retirement
funds did not add up to nearly as much money as they had hoped.
What had gone wrong for them? They had invested in their employers’ 401(k) retirement
plans, they had tried to do their best to save, delayed having children, even at times trying to
do without in order to plan for a comfortable old age. What they had neglected was to pay
attention to the management fees charged to their 401(k) plans.
When asked, most investors have long thought that investment management fees can best
be described in one word: low. Indeed, fees are seen as so low that they are almost
inconsequential when choosing an investment manager. This view, however, is a delusion.

If you don’t get involved in knowing the fees that are being taken from your retirement
savings, you can lose much more than this example – over 30%! Consider losing 30 dollars
out of every 100 dollars you save for a period of 30 years or more. At the end of that time
period, you could ideally have saved around 3000 dollars, but once you pay off management
fees, all you will be left with is 2100 dollars. Convert the amount to real life earnings and
savings and you see the exorbitant amount of money you lose to all those ‘hidden charges’
such as management fees from your retirement savings.
This is not to say that you should now decide to forego having a managed retirement plan.
Most of us, without something as concrete as a retirement plan to give us that nudge every
month or year that we need to save up money for later, will end up not saving a penny.
However, the idea is to be able to make more informed decisions regarding your earnings
and savings. Here’s what you need to know:

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