Why the first five years after you stop working may determine if your retirement survives, and what to do about it

In this article, we look at:

• Why the first five years of your retirement are especially dangerous.
• How sequence-of-returns risk can derail your retirement.
• What research says about retirement failures.
• Practical strategies that can protect your retirement plan.
• What you have to avoid doing to prevent a bad situation from turning much worse.

What We Tend to Focus On

Although I worked for 40 years, for the first 25 of those, I earned too little to set aside much, if anything, for retirement.

That’s why, during the remaining 15 years, I did (almost) everything I could to build up our nest egg. Beyond investing significant amounts each of those 15 years, and picking (mostly) the right funds, I have to acknowledge that luck played a role, too. During that period, the market significantly outperformed its long-term average, giving us a strong tailwind. 

From 2010 to 2025, the S&P 500 achieved a 728% total return (Figure 1), a nominal annualized return of 14.1%, and an inflation-adjusted annualized return of 11.3%. That’s almost 80% higher than 16 years would have returned at a 10% annualized rate.

Between our efforts and favorable markets, by the end of 2025, I reached “work optional” status and decided to mostly retire. I add that word, “mostly,” because I continue to do some consulting work and also get paid for writing these articles.

When You Retire Matters, a Lot!

First, let’s acknowledge that the year you retire can have a massive impact on your retirement portfolio.

Let’s look at inflation-adjusted portfolio value over the course of a 30-year retirement for two hypothetical retirees using the 4% rule. The first, less fortunate one retired in 1966, while the second “chose” to retire at a much more fortunate time, in 1990.

As Figure 2 shows, after 30 years in retirement, the 1990 retiree’s portfolio was worth, after adjusting for inflation, nearly 70% more than its initial value, while the 1966 retiree’s portfolio lost nearly 80% of its initial value. Overall, the difference over 30 years was nearly 8-fold!

The Pitfall Most of Us Don’t Consider

It’s possibly the biggest risk to retirement success.

The so-called “sequence of returns risk,” i.e., the order in which market gains and losses happen, may matter more than your average returns. 

Catching a good break here, or a bad one, can make or break retirement success. Especially if your retirement lasts much longer than 30 years.

Take a hypothetical retiree who retired in an “alternate-history” 1990, where market returns for the following 30 years stayed the same, but were reordered such that retirement kicked off with the worst three years, followed by the remaining 27 years in the original order. 

Figure 3 shows that despite having the same 30 years’ worth of annual returns and withdrawing the same $40k in inflation-adjusted dollars, the “alternate 1990” portfolio ended 65% lower than that of the retiree who experienced the actual history of returns from 1990. Instead of gaining nearly 70% over 30 years, the “alternate-history” retiree’s portfolio lost nearly 40%.

That’s bad enough, but it can get much, much worse.

Let’s redo the same exercise with a hypothetical retiree who retired in 1966 vs. one who retired in an “alternate history” 1966. Here, again, the worst three years kicked off their retirement. 

As Figure 4 shows, instead of the already less-than-stellar loss of nearly 80% of portfolio value over 30 years, the “alternate-history” 1966 retiree’s portfolio went to zero by their 25^th year of retirement. Imagine being twenty-five years into retirement and realizing your portfolio is all gone!

Why such a difference, if they experienced the same set of returns, just in a different order?

Indeed, had there been no annual draws, the portfolios of the 1966 retiree and the “alternate” 1966 retiree would have ended at the same value after 30 years. However, the annual draws were drawn in both cases, but the number of shares the “alternate” 1966 retiree would have needed to sell each year to draw the same $40k would have been much greater than for the original 1966 retiree.

Early losses force you to sell more shares when prices are low, leaving fewer shares available when markets recover.

That’s why the alternate 1966 portfolio failed to survive the full 30 years. It lost too much capital in the first three years, so that even when the remaining “better” 27 years arrived, it was too late to recover.

That’s the nightmare scenario retirees fear most.

The lesson is simple but uncomfortable: retirement success depends not only on how much you saved or even on your average market returns throughout retirement. What markets do during your first few years of retirement can be equally critical.

Is This Just Anecdotal or Systematic?

Research shows that sequence-of-returns risk is more than an anecdotal situation.

According to Morningstar’s “The State of Retirement Income: 2025” report, they ran Monte Carlo simulations and required a 90% success rate for a given strategy. In other words, they defined a successful strategy as one that didn’t run out of money in at least 90% of simulated 30-year market scenarios.

They then checked how the 10% scenarios that ran out of money in less than 30 years differed from the 90% of scenarios that didn’t run out. 

They say, “For… the 10% of simulated random trials in which the retiree exhausted their savings before the end of retirement… nearly 70% of these ‘failures’ involved trials in which the retiree’s investments had lost value by the end of year 5 of retirement.”

This implies that market returns in your first five years of retirement may well determine whether your retirement plan succeeds or fails. The first five years are especially important because losses during that period permanently damage a portfolio’s ability to recover.

Ben Simerly, CFP®, Financial Advisor & Founder, Lakehouse Family Wealth, also sees sequence of returns risk as a critical consideration, “​As a firm focused on near- and recent retirees, sequence-of-return risk is the biggest monster under the bed that clients don’t know can hurt them.  While most prospective clients ask about what sexy stock or fund tip we have or our pricing structure, I don’t think I’ve ever been asked about an early-retirement or near-retirement recession in a first meeting, or what to do about it.

Omar Morillo CFP ChFC AIF, Founder & Senior Wealth Advisor, Imperio Wealth Advisors agrees, “Sequence-of-returns risk is most dangerous in the early years of retirement, when withdrawals begin, and the portfolio has less time to recover from market declines. A practical way to address this is to first secure the spending required for essential expenses through guaranteed income sources. When those core needs are covered, the rest of the portfolio can remain invested with a longer-term perspective rather than being forced into defensive moves during volatile markets.” 

Put differently, retirement success often depends less on your average long-term returns and more on what markets do during the first five years after you stop working.

Other Risks Early in Retirement

The sequence of returns is indeed a critical risk, but it’s not the only significant risk. Other risks include:

• Longevity risk: If you live significantly longer than average, your likelihood of running out of money increases.
• Healthcare expense risk: If you suffer catastrophic medical expenses, you have a greater risk of retirement failure.
• Inflation risk: If prices rise faster than your portfolio can accommodate, your risk of failure grows. This relates to your personal rate of inflation, given the categories of goods and services you buy, rather than the generic Consumer Price Index (CPI).

Morillo adds another risk, “Long-term care is another financial risk that retirees often underestimate. A prolonged care event can dramatically increase spending, disrupt a portfolio’s withdrawal strategy, and force the liquidation of assets at unfavorable times. Without a plan for that possibility, even well-funded retirements can face significant strain in later years.”

Chris Chen CFP, Owner, Insight Financial Strategists, cautions of the opposite risk from the sequence of returns, “I’ve observed that it’s difficult for new retirees to look at their retirement risks holistically. Many who are aware of the sequence of risk returns tend to become too conservative, increasing their inflation risk, especially when the expected life expectancy is long. That happens because many who retire at, say, 65, should expect to live another 30+ years, at least from a retirement planning standpoint. So, the financial conservativeness that retirees gravitate to in order to counter sequence of return risk and not run out of money can translate into too much conservativeness that increases the risk of running out of money in a different way.”

How to Mitigate Sequence-of-Returns Risk

As we saw above, the most dangerous years of retirement are usually the first five.

That’s why the strategies below are designed to protect retirees especially during those crucial first years. They can help mitigate the risk that poor early-retirement market returns will eviscerate your portfolio (note that these won’t apply equally for all retirees).

• Phased retirement: If you and/or your spouse continue to bring in part-time non-portfolio income early in retirement, the impact of a market crash is much more muted. This includes cases where one spouse retires before the other. Related to this, if you can “unretire” for a year or two if your portfolio crashes early in retirement, you can avoid selling depressed assets. My wife and I implement this strategy, as she continues to work for a few more years, and I’m just “mostly retired.”
• Buckets strategy: Allocating several years’ worth of expenses to bonds lets you cover expenses during a possible bear market early in retirement without selling any equities. Allocating several more years’ worth of expenses to cash lets you cover expenses without selling either equities or bonds, should both suffer negative returns, until markets recover. In our case, I’m keeping a couple of years’ worth of expenses in cash and another three years’ expenses in bonds.
  • Mike Hunsberger, ChFC®, CFP®, CCFC, Owner, Next Mission Financial Planning, agrees, “To protect against sequence of return risk, I typically recommend clients maintain 3-5 years’ worth of spending in liquid, protected investments. This can prevent them from having to take out money if the stock market decreases early in retirement.” Chen also likes the buckets approach, “I use the bucket method to balance the need for low short-term volatility with the need for long-term growth to support a retiree’s lifestyle. I find that it helps create a more stable and more predictable retirement plan.”
• Dynamic withdrawals: Several withdrawal strategies have you reduce your spending if your portfolio value decreases too much. These so-called dynamic strategies include, e.g., the “Guardrails Approach” and the “Risk-Based Guardrails Approach.” Related to this, try to keep your non-discretionary expenses to as low as possible a fraction of your retirement budget. This offers greater flexibility to adjust your spending if and when your strategy requires it. We haven’t had to start drawing on our portfolio yet, but I plan to use a version of the Guardrails Approach once we do.

What Not to Do – How to Avoid Making a Bad Situation Worse

Behavioral finance research shows we feel the pain of loss twice as keenly as we enjoy an equivalent gain. This “loss aversion” creates a psychological trap that’s especially severe if you experience market losses early in retirement.

Before retirement, given that you’re covering expenses from non-portfolio income, market downturns are simply opportunities to buy more assets at a discount. And since most bear markets (losses of more than 20%) reverse in under two years, it’s easier to stay the course.

However, once you retire and live off portfolio income, severe market losses are very triggering. Seeing your portfolio shrink due to market losses, at the same time as it shrinks due to your withdrawals, can be terrifying, even if your plan was designed to accommodate these scenarios.

Brennan Decima, Owner, Decima Wealth Consulting, puts it like this, “One of the biggest risks in retirement is underestimating the impact of a bad market right before or shortly after retirement. Market volatility is an opportunity in the accumulation phase, because regular paycheck contributions take advantage of buying low and speeding up the recovery. However, a major drop in the market around retirement creates quicksand. The market goes down, and now, instead of buying, retirees are forced to sell when the market is down. This risk can be devastating if the right amount of protection is not in place.” 

Another behavioral finance factor, recency bias, makes it feel like the losses you’ve just experienced will continue forever.

When markets crash early in retirement, before you’ve had a chance to experience your plan working well, loss aversion and recency bias can make it incredibly difficult to avoid panic selling your depressed shares, locking in losses, and preventing your portfolio from ever recovering, leading to retirement failure.

The same risk mitigation strategies mentioned above can help you avoid your worst instincts from derailing your retirement plan. The goal isn’t just to optimize your retirement math, but also to make it emotionally sustainable in the face of market crashes.

After all, it isn’t a question of “if” markets will crash, but rather of “when” they will do so. And while you can’t control when market crashes happen, you can design a retirement plan that helps you survive them.

Morillo points out a related mistake: “One of the most common mistakes retirees make is entering retirement without securing a reliable income floor. Many people carefully insure against medical expenses through Medicare supplement coverage, yet they leave themselves fully exposed to market volatility. Establishing a baseline of guaranteed income through sources such as pensions, Social Security, or carefully structured annuities can stabilize a retirement plan and reduce the pressure to sell investments during market downturns.”

Hunsberger relates another mistake, “One mistake I see retirees make is underestimating how much they will actually spend in early retirement. Conventional wisdom used to say spending would drop early in retirement. I find that for most retirees, especially early retirees, spending stays level or may actually increase early in retirement as they look to do all the things they put off doing while they were working. Early retirement should be a period of experimentation. Try new things to make sure you have purpose and fulfillment. Both of these things are incredibly important to have a happy retirement.”

Simerly adds several things to be more mindful of beyond simple sequence of returns, “The two biggest areas of sequence-of-returns risk that are typically ignored are asset category withdrawal strategies and investments that focus on results rather than costs.  Asset category withdrawal strategies are simply a fancy way to pull cash when markets are down, rather than from the more aggressive investments that need a chance to catch up. In reality, it gets more complex. Do you pull from actual cash? Or money market funds? Or bonds, and which bonds? Or maybe your I-bond account with the treasury department, or should you use the conservative bucket in your advisor’s investment portfolio?  And then how do you refill those asset types after drawing them down? How do you handle the reallocation of funds and the creation of income?  

“The reality is that most near-retirees and recent retirees, as well as many advisors, are not thinking about these questions. When trouble strikes, they are winging it and have no downturn strategy in place.  The second issue of investment costs is one that I believe was created by marketers, not by markets. 

“At some point in history, some investment companies realized that if they marketed based on fund cost, it didn’t matter how a fund performed. People flock to low-cost no matter what the outcome. Because investments are all basically the same, right?   Wrong.  In my opinion, the reality that the wealthy understand is that what is marketed to the general public is usually the cheapest and weakest form of investing.   And the kicker? The general public has mostly the same access to better investments as the wealthy. It’s about desire and knowledge to access them, not the access itself. That’s where either some googling or professional help comes into play.  In reality, every investor should be focused on the net-return, read: after expenses and fees, over an extended period of time, say 10 years minimum if not far more, alongside net return during downturns.  

“In short, focus on after-expense returns and returns during downturns, instead of the expenses.   And that’s just the basic principle. In real use, there are a multitude of investments that are built to help reduce downturns, but will still aggressively pursue gains in good times, relative to a desired level of risk.   The key advantage of expanding your investment horizons or working with your advisor is that a whole new world of possibilities opens up in reducing the sequence of returns risk and making money last in retirement.”  

The Bottom Line

Even if, like me, you’ve been able to accumulate a nest egg sufficient to reach “work optional” status, how the markets behave in the first few years of your retirement can make or break your plans.

That’s why it’s crucial to incorporate into your plan mitigations that reduce the impact of potential early market losses, both in concrete monetary terms and in emotional terms, that let you stay the course without derailing yourself.

Key Takeaways for Pre-Retirees and Retirees Early in Retirement

• Market returns in the first five years of retirement matter far more than most people realize.
• Early losses force you to sell more shares when prices are lowest, and once that capital is gone, recovery becomes extremely difficult.
• Strategies like phased retirement, buckets, and dynamic withdrawals can mitigate this risk.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

Learn More About Opher

Why your employer’s retirement plan may cost you nearly 30% of your savings (and what to do about it)

It won’t make you wealthy overnight, or even in a decade.

However, a well-funded 401(k) plan can very well get you to work optional status over a career, or even in 20 years or less, as mine did for me.

That is, if fees don’t quietly eat away much of your retirement plan balance along the way.

The “1% Fee Rule”

Retirement researchers often highlight a striking rule of thumb.

A seemingly small difference in annual fees can have enormous long-term consequences.

According to the US Department of Labor (DOL), “…1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent [over a 35-year career].”

That’s not because the fees are so large in any single year. It’s because they compound.

Each year, fees slightly reduce your account balance. That smaller balance then earns less growth from that point on. Over the decades, that lost growth becomes far larger than the fees themselves.

That’s why even small differences in 401(k) costs deserve close attention.

Do Fees Really Vary By That Much?

Indeed, they do.

According to Cision PRWeb’s 2025 401k Averages Book, smaller plans pay more than larger ones. For example, $5 million plans’ average fees total 1.08%, while $50 million plans’ fees average a much lower 0.76%. 

What’s worse, they report that for $1 million plans with 100 participants, fees ranged dramatically, from a low of 0.87% to a high of 3.56%!

Why Does This Happen?

Large employers can pay dramatically lower retirement plan fees because they have negotiating power. With thousands of participants and up to a billion dollars or more in assets, they can access institutional share classes and command lower administrative costs. 

Small employers simply can’t do the same. And from the wide disparity in small-plan fee levels, some don’t even do as well by their employees as they could!

How Fees Can Injure Your Retirement Plan

Two workers can earn the same salary, save the same percentage, and even invest in the same asset classes, yet one may retire with hundreds of thousands of dollars more than the other!

Further, this may have nothing to do with their investment skills.

It might simply be because of where they work.

Imagine you and your friend are both 25 years old, and both earn the same $85,400 (roughly the median US household income, scaling Fed 2024 data up 2% per Motio research reported by Seeking Alpha).

You each contribute to your 401(k) enough to max out your respective employers’ dollar-for-dollar match up to 6% of compensation. Both of you pick a low-cost ETF that returns an annual average of 7% above inflation.

Your respective compensations track each other, both rising 1% a year faster than inflation. 

However, your friend works for a much larger employer, whose 401(k) plan manages over $1 billion in assets, so their annual fees are 0.27%, while you work for a small business whose 401(k) plan manages under $1 million, so your annual fees are 1.26%.

That 0.99% difference in annual fees sounds annoying, but surely it doesn’t rise to the level of concern mentioned above, right?

Wrong!

Adjusting for inflation, Figure 1 shows how much each of you would pay in 401(k) fees over your career, assuming you retire at Social Security’s current full retirement age of 67.

By retirement, your friend would pay a sizeable $92k.

You, on the other hand, would be taken to the cleaners, paying nearly four times as much, at $356k!

Figure 2 shows your respective 401(k) plan balances over time.

By age 67, your balance would be $2.17 million, while your friend would have $2.85 million!

Those annual fees, less than 1% higher for you, would have eaten $264k more from your account than your friend’s. However, what’s worse is that you’d also lose a good chunk of account growth as a result, for a total loss of over $679k!

That’s because fees reduce your balance each year, leaving less money invested. Over decades, that smaller balance compounds into dramatically lower retirement wealth.

Another way to look at the impact is that you’d need to work to age 67 to end up with the same 401(k) balance that your friend would have around age 63, allowing him to retire nearly four years earlier!

If your friend decided to retire at age 57, with a $1.37 million 401(k) balance, you’d need to keep working to age 60 to reach that same balance.

As Table 1 shows, compared to a hypothetical 401(k) plan with zero fees, your friend loses a total of $224k, or 7% of potential accumulation; while you lose $903k, over 29% of your accumulation. As a result, at age 67, your friend can draw 114% of his last pay, enough for some high-end travel, while you’d need to make do with 87% of yours.

All this becomes far worse if your small employer’s 401(k) plan doesn’t offer solid, low-cost funds like those offered by your friend’s plan. If a similarly performing fund in your plan charges 0.5% more than your friend’s fund, your ending balance would shrink by a further $273k, for a total loss of over 38%!

And all this, because you work for a much smaller employer than your friend!

How Does All This Affect Your Chance of Successful Retirement?

The Center for American Progress carried out simulations to see how 401(k) fee levels affect the probability of achieving sufficient retirement income. Perhaps unsurprisingly, they found that success probability and fee levels are significantly negatively correlated, i.e., the higher the fees, the lower the likelihood of success. 

As shown in Table 2, the typical worker can achieve a high enough retirement income 69% of the time if their plan fees are 0.5%, but this drops precipitously to just 29% if fees are 2%.

Is All This Common Knowledge?

You would think that anything that could so massively impact your eventual nest egg size would be common knowledge.

If so, you’d be wrong!

According to the Government Accountability Office (GAO), “GAO found that 45 percent of participants are not able to use the information given in disclosures to determine the cost of their investment fee. Additionally, 41 percent of participants incorrectly believe that they do not pay any 401(k) plan fees.”

So, not only do fees make a huge difference, but more than 4 in 10 participants thought they paid no fees, and even of those who knew there were fees, 45% couldn’t figure out how to translate the fee information plans disclosed to them into practical financial results.

What You Can (and Probably Should) Do

Nobody is suggesting that you quit your job if you work for a smaller employer, just because their 401(k) plan fees are higher.

However, there are steps you should consider:

• Ask HR or your 401(k) plan administrator how much your plan charges in fees, and how much additional fees are charged by each specific fund in the plan. As they say, knowledge is power.
• Next, review your portfolio to see if the funds you picked that charge higher fees achieve better after-fee results. Research shows that, on average, the opposite is true.
• For those funds that charge you higher fees and achieve lower returns, move your money into funds with higher after-fee returns.
• If your plan is so small that it has to charge high management fees, consider contributing each year only enough to max out your employer match, if any. Whatever further amounts you can save should be invested in an IRA with good fund options and much lower fees.
• If your plan has such high fees and you leave that job, roll your 401(k) balance into a lower-cost IRA, as above.

A Counter-Intuitive Exception

Interestingly, despite the negative correlation between plan size and annual fees, the smallest plans in the country aren’t the most expensive.

Individual 401(k) plans for self-employed workers, with just one participant and likely under a $1 million balance, can be among the cheapest.

That’s been my personal experience.

As I alluded to above, I invested heavily in my 401(k) plan for over 15 years. And that plan had exactly one participant – me. As a result, the plan balance has always been very small compared to plans run for employers with multiple employees.

However, my individual 401(k) plan doesn’t charge any management fees, beyond those charged by the mutual funds and/or Exchange Traded Funds (ETFs) in which I invest my plan balance. 

There is a $20 service fee per account, but that fee is waived for an individual with a combined balance of at least $50k, which I surpassed many years ago.

This is possible because with just one participant – me, and with me also acting as the plan administrator (minimal effort required), there’s nearly no administrative overhead, and I can pick very low-cost ETFs and relatively low-cost mutual funds.

My per-fund fees vary from 0.03% for index ETFs like Vanguard’s S&P 500 ETF (VOO) to 0.61% for T. Rowe Price Capital Appreciation Fund – I Class (TRAIX). As a result, I end up paying an average fee of just 0.10%!

If you own a solo business, an individual 401(k) can make it much easier to build a nest egg than most employers’ 401(k) plans, even ones that charge relatively low fees.

The Pros Weigh In

I asked professional financial advisors three questions. Here’s what they had to say.

How much do fees really impact retirement outcomes over decades?

Jakhongir “King” Mirtalipov, Founder and Principal Advisor, Dream Life Wealth Management, says, “Considering fees is essential when it comes to employer retirement accounts like 401(k). Administrative fees associated with offering 401(k) plans have come down significantly over the last few years due to high competition, but those fees still could be thousands of dollars per year. For companies with fewer than 100 employees, those fees could be a significant expense annually. One of the ways companies ‘share’ those fees with employees is by ‘offering’ high-cost (high expense ratio) investments (active mutual funds and ETFs) in their 401(k) plans.”

Lucas Fender, CRPS®, Chartered Retirement Plans Specialist at Proper Planning & Wealth Management, agrees, “Fees in the absence of value can be extremely costly when compounded over many years. Some plans offer in-person meetings with experienced, credentialed advisors. Other plans have an unlicensed person come by the office once or twice a year to click through a premade slideshow.”

Dr. Steven Crane, Founder of Financial Legacy Builders, also agrees and expands, “Many people underestimate how much fees matter over time because they look small on paper. If someone sees a 1% fee versus a 0.10% fee, it doesn’t sound like a big deal. But when you stretch that difference over 20 or 30 years of compounding, it can quietly eat away a huge portion of someone’s retirement savings. For middle-class workers, especially, every dollar matters. Losing a big chunk of growth to unnecessary fees can mean the difference between retiring comfortably and constantly worrying about running out of money.”

What should workers look for when evaluating investment options inside their 401(k)?

Mirtalipov again, “If a retirement plan offers ETFs or index funds, I always recommend considering those investments first, as they typically have very low internal costs (expense ratios). Another option, in the absence of low-cost ETFs or index funds, would be to choose a retirement target-date fund.”

Fender says, “Workers should look for a variety of investment options available within their retirement plan, including low-cost passive funds, a stable value option, and perhaps actively managed funds or a self-directed brokerage account (SDBA). Workers should also look for low-cost, highly rated target date funds (TDFs) within their retirement plans.”

Crane advises, “The first thing I usually tell workers is to keep it simple. Look at the expense ratios of the funds. In many plans, low-cost index fund options sit right next to much more expensive actively managed funds. The expensive ones are often marketed as being more sophisticated, but that doesn’t mean they perform better. In many cases, the simpler, lower-cost options end up doing just fine over long periods. Another thing people should pay attention to is how diversified their options are and whether the funds actually match their time horizon. A 30-year-old should not invest the same way as someone who’s 60. But unfortunately, many workers either pick a few funds at random or leave their money in whatever the default option was when they enrolled.”

What can workers do to minimize the impact of fees on their 401(k) balances?

Mirtalipov suggests, “Investment growth takes time and patience. Minimizing frequent changes in the account can help with lowering expenses, as many 401(k) plans charge extra if you make frequent changes in your account. Maximizing contributions and at least receiving the full match from the employer helps offset the cost. You can also roll your 401(k) to your IRA at the age of 59.5 if you’re still employed (the process is called an in-service rollover). Rolling over to your IRA is not a taxable event, and so there are no taxes to be paid (if done correctly). By rolling into a self-directed IRA, you can decrease or eliminate fees associated with employer retirement plans. For example, Schwab doesn’t charge any commissions when you buy the majority of ETFs or individual stocks through their platform.”

Fender offers this advice, “Workers may minimize the impact of fees in their 401(k) balances by choosing lower-cost investments within the plan. Another option is to utilize a self-directed brokerage account to access even lower-cost investments. In some cases, they may want to speak with their benefits department about choosing different investment options or even 401(k) providers.” This last assumes the employer is open to such changes.

Crane’s mostly agrees and adds, “If someone wants to minimize the impact of fees, the biggest lever they have is to choose lower-cost investments when available. Index funds and target-date funds with reasonable expense ratios are often good starting points. If the plan options are limited or unusually expensive, another strategy is to contribute enough to capture the employer match, then invest additional savings in an IRA, where you usually have far more choices and lower-cost options. At the end of the day, a 401(k) is still one of the best tools workers have for building retirement savings, especially if there’s an employer match involved. But it’s worth taking a little time to understand what’s happening under the hood, because small fees that seem harmless today can quietly add up to a very large number over a working lifetime.”

One advisor offered a completely different viewpoint.

Ben Simerly, CFP®, Financial Advisor and Founder, Lakehouse Family Wealth, says this, “Not all employer retirement plans are built alike. In fact, at a high level, last I checked, there were about 27 different types of employer retirement plans, and thousands of permutations. So, the first thing I coach any client on as they job hunt is how to ask for retirement plan and benefits documents from a prospective employer. 

“The first thing we all look at is costs, right? And it’s a reasonable starting point for a 401(k). 1% really adds up. But the real cost/benefit is in what you get for it. So, I advise clients to look at plans with me with three ideas in mind:

• “The available investments. Always zoom back out from fees and take a look at the broader plan. The reality is that most plans pick investments based on the likelihood of a lawsuit, not performance or quality. The two are different goals. For example, between some common 401(k) funds with comparable risk and class, there is as much as a 6-8% difference in average annual growth rate over 10 years. I’ll happily pay 1% more for that much more growth.
• “The features in the plan. Better contribution matching, better investments, better Roth and In-Plan rollover options, in-service distributions, and Mega-Back-Door-Roth-IRA options are all potentially worth more than a decrease in cost. The keyword being ‘potentially.’
• “Talk to decision makers. More often than not, these folks have too much on their plate. If you’re willing to do the digging, they may let you help them make a change. I’ve worked with owners of many small and mid-size companies who were happy to make a change if someone was willing to do the legwork for them. Always compare benefits and then maximize them accordingly.”

The Bottom Line

In investing, we often obsess over market returns. 

But for many workers, one of the most important determinants of retirement success may be far simpler: how much their 401(k) quietly charges them every year.

High-fee 401(k) plans can dramatically reduce your ending balance and, through that, delay your retirement date and/or reduce your retirement income. 

This can be one of many considerations regarding where you choose to work, but even if your other considerations have you pick a small employer, you can minimize the impact on your retirement plans’ total balance by educating yourself about fees and their impacts, checking what each fund in your plan(s) has returned net of fees over the long term, and choosing how much you invest in your 401(k) vs. your IRA.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

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