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I pay $2,164 a year in retirement account fees – one month’s worth of contributions – should I leave one of the plans for an IRA instead?

I’m 44, married and have a small family. I have been working a government job for 15 years. I make approximately $41,000 take home per year ($3,416.00/month) after all deductions and savings. 

I contribute $2,053 a month to three employer accounts (Defined Contribution, Supplemental Annuity and Deferred Compensation Plan 401(a). I just started to look at my fees and I was somewhat shocked. Between the three accounts the annual fees come out to be $2,164 per year, more than one month of contributions. I have been investing outside of my employer-sponsored accounts with diversified low-fee domestic ETFs. The only employer account I can change much on is the $600 month I’m adding to my Deferred Compensation Plan 401(a). 

Are the tax advantages worth it in retirement to continue paying the management fees in this plan or just add that to what I am investing in the low-fee ETFs? Are there other ways to negotiate fees with employer sponsored retirement plans? 

Sincerely, 

Saving for 12 months investing for 11 months 

See: We want to retire in a few years, and have about $1 million saved. Should I move my money to a Roth, and pay off my $200,000 mortgage while I’m at it? 

Dear Saving, 

It’s great that you’re looking at the fees in your retirement account – they can really eat away at your nest egg if not managed properly. 

I can’t dive too deeply into your personal situation, especially since I do not have the specifics of your retirement plans in front of me, but you ask an interesting question, and one I know others have wondered too. Does it ever make sense to choose an outside account, like an IRA or taxable brokerage account, where you have more control in your portfolio, over an employer-sponsored account, like a 401(k)? 

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You mentioned you have three different employer accounts (a gift in itself, honestly!) and that the only one you can really do anything about is the one where you contribute $600 a month. My first question for you is: would no longer contributing the $600 to that plan make much of a difference in that $2,164 figure you calculated? Try to get very granular about the account details, and review what each plan charges. You may find that the 401(a) fees really aren’t so bad, and eliminating your $600 contribution wouldn’t cause a dramatic change in the amount you pay in fees every year. 

All retirement plans – whether in the private sector or from the government – have their own specific rules, so it’s hard to say whether or not you can really change anything. Larger companies’ retirement offerings tend to have lower fees than those of smaller businesses. For example, 401(k) plans with 1,000 participants and $50 million in assets had average fees of 0.90% in 2021, compared with smaller plans with 100 participants and $5 million in assets, which had an average of 1.20%, according to the 401k Averages Book, which tracks and compares these accounts’ fees. Employees can’t negotiate the fees with their employer. Decisions about fees are made between employers and the firms providing the retirement plans.

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There may be investment choices within these plans you could alter, but that’s something you will have to discuss with your plan sponsor. Someone in HR could likely help you make sense of this information, or from the investment firm housing these accounts, by sending you important plan documents that spell out what’s available, when changes are allowed and how to navigate the system. 

Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey 

I will say – saving in another investment account in addition to these plans is wonderful, but there are plenty of reasons you may want to stick with that $600 contribution in an employer-sponsored retirement account. The 401(a) allows for employer contributions, including matching employees’ contributions, so that’s essentially like “free” money when it’s vested. There’s no employer match with a brokerage account or your typical IRA. 

I’m not sure where you’re investing in these ETFs, but if it were to be in an IRA, keep in mind how much you contribute would be limited. The maximum annual contribution for an IRA is $6,000 for people under 50 years old. But your $600 contribution per month equates to $7,200 a year, which means you’re shutting out $1,200 in contributions if you’re in an IRA. 

There are plenty of tax perks to IRAs though. You may not qualify for any tax deductions with a traditional IRA because of your participation in employer-sponsored accounts, but you can contribute to these accounts pretax, which is great if you’re in a lower tax bracket now than you expect to be in retirement. With a Roth IRA, you would pay the tax on your contributions now and reap the benefits of tax-free withdrawals in retirement, a benefit if you expect to be in a lower tax bracket in retirement (or you think the government will increase tax rates by the time you get there). 

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Regardless, investing in an additional account when you’re already participating in employer-sponsored plans will help you tremendously in old age. 

While you’re doing your analyses, I suggest you also review how your ETFs are actually doing. Fees are important, but so is the performance and appropriateness of the investments in your portfolios. Don’t fret if your portfolio isn’t doing particularly well right now – to say the stock market is volatile these last few months would be an understatement – but do check in on your investment choices to make sure they’re the right fit for your goals and needs, and that they’re working best for you in the long run. 

Readers: Do you have suggestions for this reader? Add them in the comments below.

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