That's because retail IRA fund fees tend to be higher than those charged by 401 (k) plans. In doing this analysis, you should also consider other possible charges, such as annual account charges and brokerage account fees, retirement charges, and the processing of a domestic relations order that your employer plan may evaluate compared to an accumulated IRA account. However, if you want your retirement account to cover education expenses, insurance premiums if you lose your job, or part of buying a home, only an IRA offers those options without penalty. While 401 (k) are usually only offered by employers (who usually match employee contributions), individuals can open IRAs through any retail brokerage firm.
Next, we'll explain the most common types of fees for both 401 (k) and IRAs, what to consider when choosing a provider, and which type of account has the highest fees. Since 401 (k) and IRA plans are meant to help you save for later years, penalties are imposed for withdrawing money early. An IRA is more like a typical retail brokerage account, since your investment options are not restricted. Because 401 (k) plans offer limited investment options, you may be limited to buying only mutual fund shares, which usually charge higher fees than other types of securities that can be accessed with IRAs.
Unfortunately, you won't have many options when it comes to your 401 (k) plan if you're employed with a W-2 form, but you should be able to determine if the plan they offer you offers fair rates or if it's better to change it as soon as you move to a new position. In reality, the fees are not hidden, but rather are shown in the prospectus that is given to new customers when they sign up for a plan. The Department of Labor requires 401 (k) plan providers to disclose all charges in a prospectus given to you when you enroll in a plan and which must be updated every year. Even though the employer plan shares have the same spending ratio as the retail alternative, the cumulative IRA will always have lower annual expenses due to the lack of an annual account fee.
Since you have much more control over where to store your IRA, try to find a provider that doesn't charge anything to open and maintain an account. The problem, according to a report released Thursday by Pew Charitable Trusts, is due to the favorable commission structures of mutual funds that are generally found in employer-sponsored retirement plans, such as 401 (k), but are not available to retail investors in individual retirement accounts. In addition, with a wider variety of investment types, you can also save money on fees if you choose low-fee exchange-traded funds (ETFs) for your IRA portfolio. The main providers of automated IRAs or with robotic advisors usually charge between 0.20% and 0.36% in advisory and investment fees, although some companies offer even lower fees.
Citing characteristics such as low fees, access to institutional funding and the value of fiduciary oversight, employers are now encouraging participants to leave their money in their Washington DC plan even after leaving the company.