Preparing for Retirement Archives

Mar

2025

Are Mutual Funds Good for Retirement?

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Mutual funds are one option investors may consider when building a retirement portfolio. A mutual fund represents a pooled investment that can hold a variety of different securities, including stocks and bonds. There are different types of mutual funds investors may choose from, including index funds, target date funds, and income funds.

But how do mutual funds work? Are mutual funds good for retirement or are there drawbacks to investing in them? What should be considered when choosing retirement mutual funds?

Those are important questions to ask when determining the best ways to build wealth for the long term. Here’s what you need to know about mutual funds and retirement.

Key Points

• Mutual funds offer exposure to a wide range of asset classes, and thus may fit well in a retirement portfolio.

• Approximately 53.7% of U.S. households owned mutual funds in 2024, according to industry research.

• Target-date funds adjust their asset allocation as retirement approaches, offering a tailored solution.

• Income funds focus on generating steady income, and may be suitable for retirement needs.

• Potential drawbacks of mutual funds include high fees, portfolio overweighting, and tax inefficiency.

Understanding Mutual Funds

A mutual fund pools money from multiple investors, then uses those funds to invest in a number of different securities. Mutual funds can hold stocks, bonds, and other types of securities.

How a mutual fund is categorized depends largely on what the fund invests in and what type of investment strategy it follows. For example, index funds follow a passive investment strategy, as these funds mirror the performance of a stock market benchmark. So a fund that tracks the S&P 500 index would attempt to replicate the returns of the companies included in that index.

Target-date funds utilize a different strategy. These funds automatically adjust their asset allocation based on a target retirement date. So a 2050 target-date fund, for example, is designed to shift more of its asset allocation toward bonds or fixed-income and away from stocks as the year 2050 approaches.

How Mutual Funds Work

Mutual funds allow investors to purchase shares in the fund. buying shares makes them part-owner of the fund and its underlying assets. As such, investors have the right to share in the profits of the fund. So if a mutual fund owns dividend-paying stocks, for example, any dividends received would be passed along to the fund’s investors.

• Understanding dividend payments. Depending on how the fund is structured or what the brokerage selling the fund offers, investors may be able to receive any dividends or interest as cash payments or they may be able to reinvest them. With a dividend reinvestment plan or DRIP, investors can use dividends to purchase additional shares of stock, often bypassing brokerage commission fees in the process.

• Understanding fund fees. Investors pay an expense ratio to invest in mutual funds. This reflects the annual cost of owning the fund, expressed as a percentage. Passively managed mutual funds tend to have lower expense ratios.

Actively managed funds, on the other hand, tend to be more expensive, but the idea is that higher fees may seem justified if the fund produces above-average returns.

It’s also important to know that mutual funds are priced and traded just once a day, after the market closes. This is different from exchange-traded funds, or ETFs, for example, which are similar to mutual funds in many ways, but trade on an exchange just like stocks, and typically require a lower initial investment than a mutual fund.

Investors interested in opening an investment account can learn more about how a particular mutual fund works, what it invests in, and the fees involved by reading the fund’s prospectus.

Types of Mutual Funds for Retirement

There are some mutual funds designed for people who are saving for retirement. These funds typically combine portfolio diversification, often with a greater emphasis on bonds and fixed income, and the potential for moderate gains.

For instance, retirement income funds (RIFs) are intended to be more conservative with moderate growth. RIFs may be mutual funds, ETFs, or annuities, among other products.

Target-rate funds, as mentioned, adjust their asset allocation based on an investor’s intended retirement date, and get more conservative as that date approaches. This automated strategy may help some retirement savers who are less experienced at managing their portfolios over time.

Mutual Funds for Retirement Planning

Mutual funds are arguably one of the most popular investment options for retirement planning. According to the Investment Company Institute, 53.7% of U.S. households totaling approximately 121.6 million individual investors owned mutual funds in 2024. Fifty-three percent of individuals who own mutual funds are ages 35 to 64 — in other words, those who may be planning for retirement — the research found.

There are also many investors living in retirement who own mutual funds. According to the Investment Company Institute, 58% of households aged 65 or older owned mutual funds in 2024.

So are mutual funds good for retirement? Here are some of the pros and cons to consider.

Pros of Using Mutual Funds for Retirement

Investing in mutual funds for retirement planning could be attractive for investors who want:

• Convenience

• Basic diversification

• Professional management

• Reinvestment of dividends

Investing in a mutual fund can offer exposure to a wide range of securities, which could help with diversifying a portfolio. And it may be easier and less costly to purchase a single fund that holds hundreds of stocks than to purchase individual shares in each of those companies.

The majority of mutual funds are actively managed (and sometimes called active funds). Actively managed mutual funds are professionally managed, so investors can rely on the fund manager’s expertise and knowledge. And if the fund includes dividend reinvestment, investors can increase their holdings automatically which can potentially add to the portfolio’s growth.

Cons of Using Mutual Funds for Retirement

While there are some advantages to using mutual funds for retirement planning, there are also some possible disadvantages, including:

• Potential for high fees

• Overweighting risk

• Under-performance

• Tax inefficiency

As mentioned, mutual funds carry expense ratios. While some index funds may charge as little as 0.05% in fees, there are some actively managed funds with expense ratios well above 1%. If those higher fees are not being offset by higher than expected returns (which is never a guarantee), the fund may not be worth it. Likewise, buying and selling mutual fund shares could get expensive if your brokerage charges steep trading fees.

While mutual funds generally make it easier to diversify, there’s the risk of overweighting one’s portfolio — owning the same holdings across different funds. For example, if you’re invested in five mutual funds that hold the same stock and the stock tanks, that could drag down your portfolio.

Something else to keep in mind is that an actively managed mutual fund is typically only as good as the fund manager behind it. Even the best fund managers don’t always get it right. So it’s possible that a fund’s returns may not live up to your expectations.

You may also have to contend with unexpected tax liability at the end of the year if the fund sells securities at a gain. Just like other investments, mutual funds are subject to capital gains tax. Whether you pay short- or long-term capital gains tax rates depends on how long you held a fund before selling it.

If you hold mutual funds in a tax-advantaged retirement account, then capital gains tax doesn’t enter the picture for qualified withdrawals

Pros of Mutual Funds	Cons of Mutual Funds
• Mutual funds offer convenience for investors • It may be easier and more cost-effective to diversify using mutual funds vs. individual securities • Investors benefit from the fund manager’s experience and knowledge • Dividend reinvestment may make it easier to build wealth	• Some mutual funds may carry higher expense ratios than others • Overweighting can occur if investors own multiple funds with the same underlying assets • Fund performance may not always live up to the investor’s expectations • Income distributions may result in unexpected tax liability for investors

Pros of Mutual Funds

Cons of Mutual Funds

• Mutual funds offer convenience for investors

• It may be easier and more cost-effective to diversify using mutual funds vs. individual securities

• Investors benefit from the fund manager’s experience and knowledge

• Dividend reinvestment may make it easier to build wealth

• Some mutual funds may carry higher expense ratios than others

• Overweighting can occur if investors own multiple funds with the same underlying assets

• Fund performance may not always live up to the investor’s expectations

• Income distributions may result in unexpected tax liability for investors

Investing in Mutual Funds for Retirement Planning

The steps to invest in mutual funds for retirement are simple and straightforward.

1. Start with an online brokerage account, individual retirement account (IRA) such as a traditional IRA, or a 401(k). You can also buy a mutual fund directly from the company that created it, but a brokerage account or retirement account is usually the easier way to go.

2. Set your budget. Decide how much money you can afford to invest in mutual funds. Keep in mind that the minimum investment can vary for different funds. One fund may allow you to invest with as little as $100 while another might require $1,000 to $3,000 or even more to get started. In some cases, setting up automatic contributions may lower the required minimum.

3. Choose funds. If you already have a brokerage account or an IRA like a SEP IRA, this may simply mean logging in, navigating to the section designated for buying funds, selecting the fund or funds and entering in the amount you want to invest.

4. Submit your order. You may be asked to consent to electronic delivery of the fund’s prospectus when you place your order. If your brokerage charges a fee to purchase mutual funds, that amount will likely be added to the order total. Once you submit your order to purchase mutual funds, it may take a few business days to process.

Tips for Selecting Retirement-Ready Mutual Funds

If you’re considering investing in mutual funds for retirement, here are some strategies to keep in mind.

• Determine your risk tolerance and retirement goals. As discussed previously, the closer you are to retirement, the more conservative you may want to be. For example, you might want to consider target-date or bond funds.

• Analyze the fund’s performance. You can look for funds that have a history of consistent returns for the past three, five, and 10 years.

• Check out expense ratios. If a mutual fund’s fees are high, you may want to consider other funds instead.

• Evaluate the possible tax implications. Mutual funds are subject to capital gains tax, as mentioned. Index funds may be more tax efficient. You can read more about this below.

Determining If Mutual Funds Are Right for You

Whether it makes sense to invest in mutual funds for retirement can depend on your time horizon, risk tolerance, and overall investment goals. If you’re leaning toward mutual funds for retirement planning, here are a few things to consider.

Investment Strategy

When comparing mutual funds, it’s important to understand the overall strategy the fund follows. Whether a fund is actively or passively managed may influence the level of returns generated. The fund’s investment strategy may also determine what level of risk investors are exposed to.

For example, index funds are designed to mirror the market. Growth funds, on the other hand, typically have a goal of beating the market. Between the two, growth funds may produce higher returns — but they may also entail more risk for the investor and carry higher expense ratios.

Choosing funds that align with your preferred strategy, risk tolerance, and goals matters. Otherwise, you may be disappointed by your returns or be exposed to more risk than you’re comfortable with.

Cost

Cost is an important consideration when choosing mutual funds for one reason: Higher expense ratios can eat away more of your returns.

When comparing mutual fund expense ratios, it’s important to look at the amount you’ll pay to own the fund each year. But it’s also important to consider what kind of returns the fund has produced historically. A low-fee fund may look like a bargain, but if it generates low returns then the cost savings may not be worth much.

It’s possible, however, to find plenty of low-cost index funds that produce solid returns year over year. Likewise, you shouldn’t assume that a fund with a higher expense ratio is guaranteed to outperform a less expensive one.

Fund Holdings

It’s critical to look under the hood, so to speak, to understand what a particular mutual fund owns and how often those assets turn over. This can help you to avoid overweighting your portfolio toward any one stock or sector.

Reading through the prospectus or looking up a stock’s profile online can help you to understand:

• What individual securities a mutual fund owns

• Asset allocation for each security in the fund

• How often securities are bought and sold

If you’re interested in tech stocks, for example, you may want to avoid buying two funds that each have 10% of assets tied up in the same company. Or you may want to choose a fund that has a lower turnover rate to minimize your capital gains tax liability for the year.

Tax Efficiency of Mutual Funds in Retirement

As mentioned, when held in a taxable account mutual funds are subject to capital gains tax. Dividend income from mutual funds is also taxed. When mutual funds are held in a tax-advantaged retirement account, investors need to consider the tax treatment of those accounts rather than capital gains.

With actively managed mutual funds, fund managers typically need to constantly rebalance the fund by
selling securities to reallocate assets, among other things. Those sales may create capital gains for investors. While mutual fund managers usually use tax mitigation strategies to help diminish annual capital gains, this is a factor for investors to consider.

Index funds tend to have less turnover of assets than actively managed funds and thus may generally be more tax efficient.

Managing Risk with Mutual Funds in a Retirement Portfolio

Generally speaking, mutual funds offer diversification and less risk compared to some other investments. That’s why they are often part of a retirement portfolio. However, it’s important to remember risk is inherent in investing whether you’re investing in mutual funds or another asset class.

Investors can select mutual funds that align with their risk tolerance, financial goals, and the amount of time they have before retirement (the time horizon). A younger investor may choose funds that potentially offer higher growth but also have higher risk like stock funds. Those closer to retirement age may opt for more conservative options, such as bond funds, and they might want to consider target rate funds that automatically adjust their asset allocation to be in sync with an investor’s retirement date.

Performance of Mutual Funds Compared to Other Retirement Investments

When considering mutual funds, it’s important to look at a fund’s performance over time. Not all funds hit their benchmarks or deliver consistent returns over the long term.

In 2024, according to Morningstar, of the nearly 3,900 actively managed equity funds tracked, only 13.2% beat the S&P 500 SPX index. The average gain was 13.5% compared to the 25% return of the S&P 500.

Historically, index funds have generally performed better overall than actively managed funds.

Other Types of Funds for Retirement

Mutual funds, and target date funds in particular, are one of the ways to save for retirement. But there are other options you might consider. Here’s a brief rundown of other types of funds that can be used for retirement planning.

Real Estate Investment Trusts (REITs)

A real estate investment trust isn’t a mutual fund. But it is a pooled investment that allows multiple investors to own a share in real estate. REITs pay out 90% of their income to investors as dividends.

An investor might consider a REIT, which is considered a type of alternative investment, if they’d like to reap the potential benefits of real estate investing without actually owning property.

Exchange-Traded Funds (ETFs)

Exchange-traded funds are another retirement savings option. Investing in ETFs — for instance, through a Roth or traditional IRA — may offer more flexibility compared to mutual funds. They may carry lower expense ratios than traditional funds and be more tax-efficient if they follow a passive investment strategy.

Income Funds

An income fund is a specific type of mutual fund that focuses on generating income for investors. This income can take the form of interest or dividend payments. Income funds could be an attractive option for retirement planning if an individual is interested in creating multiple income streams or reinvesting dividends until they’re ready to retire.

Bond Funds

Bond funds focus exclusively on bond holdings. The type of bonds the fund holds can depend on its objective or strategy. For example, you may find bond funds or bond ETFs that only hold corporate bonds or municipal bonds, while others offer a mix of different bond types. Bond funds could potentially help round out the fixed-income portion of your retirement portfolio.

IPO ETFs

An initial public offering or IPO represents the first time a company makes its shares available for trade on a public exchange. Investors can invest in multiple IPOs through an ETF. IPO ETFs invest in companies that have recently gone public so they offer an opportunity to get in on the ground floor. However, IPO ETFs are relatively risky and are generally more suitable for experienced investors.

The Takeaway

Mutual funds can be part of a diversified retirement planning strategy. Regardless of whether you choose to invest in mutual funds, ETFs or something else, the key is to start saving for your pos-work years sooner rather than later. Time can be one of your most valuable resources when investing for retirement.

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FAQ

Are mutual funds safer than individual stocks for retirement?

Generally speaking, mutual funds tend to carry less risk than individual stocks for retirement. Mutual funds provide diversification by investing in a mix of stocks, bonds, and other assets, which may help reduce overall risk. Individual stocks, on the other hand, depend on the performance of one company, which makes them riskier.

What percentage of my retirement portfolio should be in mutual funds?

There is no one single approach to asset allocation. The percentage of your portfolio that’s in mutual funds depends on your individual goals, risk tolerance, and time horizon. Younger investors with retirement far in the future may want to consider a more aggressive strategy that’s heavier on stocks, with more possibility for growth, but also involves more risk. Conversely, an investor near retirement age will likely want to be more conservative, and they might choose less risky options such as fixed income and bond funds.

How often should I review my mutual fund holdings?

There is no fixed rule for how often to review mutual fund holdings. Some investors may prefer biannual or annual reviews, while others might feel more comfortable with quarterly reviews. Reviewing a portfolio can help you monitor mutual fund performance, track your returns, and manage risk, so choose the schedule you are most comfortable with.

Can mutual funds provide steady income in retirement?

Certain types of mutual funds, such as retirement income funds (RIFs), are designed to provide a steady source of income in retirement. Ideally, an investor may want to have a mix of stocks, bonds, and cash investments that provide streams of income and growth in retirement and help preserve their money.

What are the tax implications of mutual fund investments in retirement?

Mutual funds are subject to capital gains tax when held in a taxable account. Actively managed funds must report capital gains every time a share is sold or purchased and may result in more capital gains tax. Index funds tend to have less turnover of assets and are generally more tax efficient. However, you may wish to consult a tax professional about your specific situation.

Photo credit: iStock/kali9

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q125-056

Mar

2025

Top 12 Jobs for Skilled Seniors That Pay Well in 2025

By Kelly Boyer Sagert | Budgeting & Goals, Preparing for Retirement, relay | Comments Off

For a growing number of Americans, turning 65 no longer automatically means retirement. Between 2015 and 2024, the number of Americans 65 and older who worked increased by more than 33%, according to a 2025 CNBC analysis of Bureau of Labor Statistics (BLS) data.

If you want to keep up the 9 to 5 into your golden years, there’s a wide range of options for you to explore. This is especially true if you’re a skilled senior interested in full-time employment.

Tips When Finding a Job as a Senior

There are pros and cons and working after retirement. If returning to the daily grind is right for you and your financial situation, then there are a few things you’ll want to keep top of mind:

• Weigh the pros and cons of working for a company versus freelancing or consulting.

• Think about whether you’d prefer to work from home or go into an office or to a job site.

• Read the job listing carefully, paying close attention to the requirements listed.

• Remove graduation dates from your resume unless they’re fairly recent.

• Include a couple of your key accomplishments in a cover letter.

• During an interview, be sure to strategically share key career highlights from the past 10 to 15 years, and spotlight the ways in which you’ve kept your skills up to date.

• Move ahead with confidence!

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12 Jobs for Skilled Seniors That Pay Well

Working can help provide seniors with extra income as well as other benefits, such as connecting with coworkers and creating a sense of purpose. Let’s take a closer look at jobs for skilled seniors that suit a variety of skills and interests.

#1: Teacher

If you have the appropriate credentials, teaching can be a rewarding job. Don’t fret if you don’t have the right credentials — you might still be able to land a position. Many high schools, career centers, and community colleges may be open to hiring experienced people to teach general interest or professional development courses. Educational organizations may also be seeking teaching assistants or tutors, both of which can be excellent jobs for skilled seniors.

#2: Pet Groomer

Have a way with four-legged friends? Consider a career as a pet groomer, where the average worker earns around $31,830 a year. You can find work in a number of settings, including grooming salons, veterinary clinics, pet stores, zoos, and animal shelters. Or, you may decide to strike out on your own. The field is experiencing a boom right now. There are more than 422,000 jobs today, according to the BLS, and the field is expected to grow by 15% between 2023 and 2023.

#3: Tax Preparer

Interested in becoming a tax preparer? If you have an accounting background, then this type of work may be a natural fit. That said, you don’t need to be a certified accountant — you just need to obtain a Preparer Tax Identification Number from the IRS and pass a competency exam.

#4: Real Estate Agent

You can earn a good income helping people buy and/or sell their home or property. But there’s another selling point to being a real estate agent: the ability to set your own schedule, as long as you can still satisfy your clients. In fact, this flexibility can be useful if you’re deciding whether you want to work part time or full time. Before you start working, you’ll need to get a license, and requirements vary by state.

#5: Bank Teller

You typically only need a high school diploma or the equivalent to qualify for a bank teller’s job, and you may be required to undergo a short period of on-the-job training. In this position, you’d handle the standard transactions at the financial institution. So if you’re comfortable handling a steady flow of cash and enjoy working with customers, this could be a job to consider.

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#6: Medical Biller

A medical biller works for a healthcare organization such as a hospital or doctor’s office and is responsible for appropriately billing insurance companies, managing the status of claims, and addressing problems that arise. This is one of those jobs for skilled seniors that require organization and the ability to follow through — in this case, with both patients and the insurance companies.

Recommended: How to Negotiate Medical Bills

#7: Virtual Assistant

Plenty of small businesses in the United States need help with daily administration tasks. Depending on your skills, virtual tasks could include making phone calls, managing emails, scheduling appointments, maintaining calendars, offering bookkeeping services, handling social media, and so forth. Although many virtual assistant jobs are part time, if you wanted more work, you could have multiple clients to whom you provide your services.

#8: Telework Nurse or Doctor

Telehealth services have greatly expanded since 2020, and demand for remote healthcare providers remains high. If you’re a recently retired nurse or doctor, and are still licensed, you may want to explore a telehealth position. It could allow you to continue providing care but from the comfort of home (or a home office).

#9: Counselor

More than half of all Americans live in an area with a shortage of mental health care professionals, according to data from the U.S. Department of Health and Human Resources. If you’re a retired counselor or therapist and are interested in working again, re-entering the field could allow you to provide much-needed services.

#10: HVAC Technicians

From installation to maintenance to repairs, HVAC pros can find themselves in great demand all year long. If you have this kind of experience, or are handy and able to incorporate HVAC into your skill sets, then this type of work can be a steady source of income.

Recommended: 25 High-Paying Trade Jobs in Demand

#11: Paralegal

Busy attorneys need plenty of help researching information, creating documentation, and contacting clients. If you have the education and experience — and you’re highly organized and able to multitask — then a paralegal job may be right for you.

#12: Grant Writer

Grant writing is a specialized type of writing where you’d write proposals to help nonprofits and other agencies to obtain funding for their programs. To succeed at grant writing, it’s important to research the requirements and deadlines of the funding, write compelling proposals to receive the grant dollars, follow up with the proposals, and write reports about them.

The Takeaway

Your golden years are what you make of them — and for some, that can mean re-entering the workforce or pursuing a new, rewarding career path. Fortunately, there are plenty of jobs for skilled seniors that suit different skills and interests and provide a source of extra income.

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FAQ

Can seniors still work full time and receive Social Security benefits?

According to the Social Security Administration, the answer is “yes.” If you’ve already reached your full retirement age, then you can work and earn as much as possible without a reduction in benefits. If you aren’t yet at full retirement age, then you can earn up to $23,400 in 2025 without a reduction. For income earned beyond that annual limit, your benefits would be lowered by $1 for each $2 earned.

What types of job skills are in high demand?

Management and leadership skills are appreciated by many employees, and these are skills seniors may well have developed over the years. It’s important to be able to effectively communicate, both verbally and in writing, and to work well with others. For many jobs, sales and marketing abilities are key, while in others the ability to research and analyze are crucial. Note that these are general categories. Specific skills will depend upon the job you’re applying for.

What type of work-life balance should working seniors expect?

Maintaining a work-life balance is especially important for working seniors. As you consider re-entering the workforce, you’ll want to consider your physical and mental health as well as your finances, and ensure that whatever job you take on will fit in your lifestyle. As an older adult, you may discover that you don’t have quite as much stamina as you once did. On the other hand, having children out of the home and on their own may open up more time than you expected.

Photo credit: iStock/Vesnaandjic

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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q125-068

Feb

2025

401(k) Withdrawal Rules to Know

By LeeMarie Kennedy | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

If you’re enrolled in a 401(k) plan and you need to get your hands on some money, you may have wondered, when can you withdraw from a 401(k)?

It’s a common question, and there are some important rules to be aware of, as well as tax implications and possible penalties. Read on to find out about the rules for withdrawing from a 401(k).

Key Points

• Withdrawals from a 401(k) can be made penalty-free starting at age 59 1/2.

• Aside from some possible exceptions, early withdrawals before 59 1/2 face a 10% penalty and are taxable.

• The rule of 55 permits penalty-free withdrawals at 55 or older for those who separate from their employer at 55 or older.

• Hardship withdrawals without penalty are available for urgent financial needs for those who qualify, but the withdrawals are subject to income taxes.

• Some 401(k) plans allow for 401(k) loans, which must be repaid in full with interest within five years.

What Are The Rules For Withdrawing From a 401(k)?

Because 401(k) plans are retirement savings plans, there are restrictions on when investors can make withdrawals. Typically, plan participants can withdraw money from their 401(k) without penalty when they reach the age of 59 ½. These are called qualified distributions. But if an individual takes out funds before that age, they may face penalties.

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At What Age Can You Withdraw From a 401(k) Without Penalty?

There are certain circumstances in which people can take an early withdrawal from their 401(k) without penalty before age 59 ½.

Under the Age of 55

If a 401(k) plan participant is under the age of 55 and still employed at the company that sponsors their plan, they have two options for withdrawing from their 401(k) penalty-free:

1. Taking out a 401(k) loan.

2. Taking out a 401(k) hardship withdrawal.

If they’re no longer employed at the company that sponsors their 401(k), individuals might choose to roll their funds into a new employer’s 401(k) plan or do an IRA rollover.

Between Ages 55–59 1/2

The IRS provision known as the rule of 55 allows account holders to take withdrawals from their 401(k) without penalty if they’re age 55 or older and leave or lose their job at age 55 or older. However, they must still pay taxes on the money they withdraw.

There are a few guidelines to consider regarding the rule of 55:

• A 401(k) plan must permit early withdrawals before age 59 ½ for individuals to take advantage of the rule of 55.

• The withdrawals must be from the 401(k) the person was contributing to at the time they left their job, and not a previous employer’s 401(k).

• The rest of the funds must remain in the 401(k) until the individual reaches age 59 ½.

• If someone rolls their 401(k) plan into an individual retirement account (IRA) such as a traditional IRA, the rule of 55 no longer applies.

After Age 73

In addition to penalties for withdrawing funds too soon, you may also face penalties if you take money out of a retirement plan too late. When you turn 73 (as long as you turned 72 after December 31, 2022), you must withdraw a certain amount of money every year, known as a required minimum distribution (RMD). If you don’t, you’ll face a penalty of up to 25% of that distribution.

The RMD amount you need to take is based on a specific IRS calculation that generally involves dividing the account balance of your 401(k) at the end of the prior year with your “life expectancy factor,” which you can find more about on the IRS website.

Withdrawing 401(k) Funds When Already Retired

If a 401(k) plan holder is retired and still has funds in their 401(k) account, they can withdraw them penalty-free at age 59 ½. The same age rules apply to retirees who rolled their 401(k) funds into an IRA.

Withdrawing 401(k) Funds While Still Employed

If a 401(k) plan holder is still employed, they can access the funds from a 401(k) account with a previous employer once they turn 59 ½. However, they may not have access to their 401(k) funds at the company where they currently work.

401(k) Hardship Withdrawals

Under certain circumstances, some 401(k) plans allow for hardship distributions. If your plan does, the criteria for eligibility should appear in the plan documents.

Hardship distributions are typically offered penalty-free in the case of an “immediate and heavy financial need,” and the amount withdrawn cannot be more than what’s necessary to meet that need. The IRS has designated certain situations that can qualify for hardship distributions, including:

• Medical expenses for the employee or their spouse, children, or beneficiary

• Cost related to purchasing a principal residence (aside from mortgage payments)

• Tuition and related educational expenses

• Preventing eviction or foreclosure on a primary residence

• Funeral costs for the employee or their spouse, children, or beneficiary

• Certain repair expenses for damage to the employee’s principal residence

Hardship distributions are typically subject to income taxes.

Taking Out a 401(k) Loan

Some retirement plans allow participants to take loans from their 401(k). The amount an individual can borrow from an eligible plan is capped at 50% of their vested account balance or $50,000 — whichever is less.

The borrower has to pay the money back plus interest, usually within five years. As long as they repay the money on time, they won’t have to pay taxes or penalties on a 401(k) loan. However, if a borrower can’t repay the loan, that’s considered a loan default and they will owe taxes and a 10% penalty on the outstanding balance if they are under age 59 ½.

IRA Rollover Bridge Loan

If you need money for a short period of time and you also happen to be doing an IRA rollover, you may be able to use that money as a loan — provided that you follow the 60-day rule. In short, the 60-day rollover rule requires that all funds withdrawn from a retirement plan be deposited into a new retirement plan within 60 days of distribution, Thus, within that 60-day window, you could potentially use the money you’re rolling over as a “bridge” loan.

401(k) Withdrawals vs Loans

While it’s generally wise to keep your retirement funds in your 401(k) for as long as possible to keep saving for your future, withdrawals and loans are possible if you need money. If you find yourself considering a 401(k) withdrawal vs. a loan, be sure to weigh the choices carefully. You’ll need to repay a loan plus interest within five years, and with an early withdrawal, you’ll either need to qualify for a hardship withdrawal and then pay income taxes on the withdrawal, or if you’re age 55, you may be able to take advantage of the rule of 55.

Cashing Out a 401(k)

Cashing out a 401(k) occurs when a participant liquidates their account. While it might sound appealing, particularly if an individual needs money right now and has no other options, cashing out a 401(k) has drawbacks. For example, if they are younger than 59 ½, the cashed-out funds will be subject to income taxes and an additional 10% penalty. That means a significant portion of their 401(k) withdrawal might be paid in taxes.

Rolling Over a 401(k)

If you’re leaving your job you may choose to roll over your 401(k) to continue saving for retirement.

This strategy allows you to roll the money into an IRA that you open and manage yourself by choosing investments — which may be things like stocks, mutual funds, and exchange-traded funds (ETFs) — and you won’t have to pay taxes or early withdrawal penalties.

With an IRA rollover, you might have a wider range of investment options than with an employer-sponsored plan (think of it as a kind of self-directed investing), and your money has a chance to potentially continue to grow tax-deferred.

The Takeaway

While it may be possible to withdraw money from a 401(k), certain factors like age and hardship distribution eligibility determine whether you can make a withdrawal without incurring taxes and penalties. You might also consider a 401(k) loan, but you’ll need to repay the money you borrow plus interest within five years.

If you are leaving or changing your job, you could opt to roll over your 401(k) into an IRA to continue saving for retirement. With a rollover, you won’t pay penalties or taxes.

Review your options carefully to decide the best course for your situation.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

Can you take out 401(k) funds if you only need the money short term?

It’s possible to take out 401(k) funds if you only need the money short term. For example, you could take out a 401(k) loan if your plan allows it. There are limits on how much you can take out, however, and you need to repay the amount you borrow plus interest within five years. Just be sure you can repay the loan so it doesn’t go into default.

How long does it take to cash out a 401(k) after leaving a job?

The length of time it takes to cash out a 401(k) after leaving a job depends on your employer and the company that administers your 401(k) plan. The process generally takes anywhere from a few days to a few weeks.

What are other alternatives to taking an early 401(k) withdrawal?

One alternative to taking an early 401(k) withdrawal is to take out a 401(k) loan instead. You will need to repay the amount you borrow plus interest within five years. As long as you do that, you won’t owe taxes on the money you borrow with a 401(k) loan.

At what age can I withdraw from my 401(k) without penalty?

You can withdraw from your 401(k) without penalty at age 59 ½. However, if you are 55 or older, and you leave or lose your job in the same calendar year that you’re 55 or older, you may be able to take out money without taxes or penalties if your 401(k) plan allows it. This is thanks to a provision called the rule of 55.

When can I access my 401(k) funds if I’m already retired?

If you are already retired, you can access your 401(k) funds anytime you like as long as you are at least 59 ½ years old. Just remember that you will owe income tax on the money you withdraw, so plan accordingly.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q125-058

Feb

2025

Can You Withdraw Money From an Annuity?

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Annuities are an insurance contract that you can purchase with a lump sum premium, or by paying small premiums over time. The rules governing how and when you can withdraw your money vary depending on the annuity policy.

Can you withdraw some or all of your money from an annuity early? In some cases, yes, and there are some legitimate reasons why you might choose to do so. However, many annuities have restrictions on withdrawals, and an early withdrawal could impact future income from the annuity, and trigger penalties and taxes. It depends on the type of annuity you own, as well as the regulations in your state.

Key Points

• An annuity is an insurance contract that you can purchase by making premium payments, and designed to provide a stream of income in retirement.

• It’s possible to withdraw funds early from an annuity, although you’ll likely face a 10% if you’re under 59 ½.

• Annuities typically come with a surrender period, during which withdrawals are not allowed. Any money withdrawn during the surrender period could incur a 7% penalty, on top of the 10% early withdrawal if you’re not yet 59 ½.

• Annuities are complex and it’s important to understand the terms of the contract before committing to an annuity purchase.

Understanding Annuities and Annuity Withdrawals

An annuity is a type of insurance contract that’s designed to provide a predictable stream of income in retirement. Typically, the owner would purchase an annuity with a lump sum premium, and take payments from the annuity according to the agreed-upon terms.

Generally, the annuity company agrees to provide a stream of income at a future date (or immediately), for a specific period of time or until the death of the annuity holder, also called the annuitant. In some cases, there may be a death benefit paid to a beneficiary, such as a surviving spouse.

Annuities can be a useful part of your retirement plan, but because they are insurance products, not securities, the terms of an annuity may not be familiar to many investors.

Recommended: Annuity Definition

The Complexity of Annuities

Unlike putting money into an IRA or 401(k), which is fairly straightforward and governed by a set of rules determined by government laws and agencies, buying an annuity is vastly more complicated — and this impacts how and when you can withdraw money from an annuity.

The rules governing these products vary from company to company, and from policy to policy. For example, some annuities are considered “fixed annuities,” because they earn a fixed rate of interest. Some are “variable annuities,” because the funds in the annuity may fluctuate because they’re invested in the market.

Annuity holders can tailor their annuities to some degree, by purchasing riders, or special terms that provide for inflation adjustments, lifetime payments, survivor benefits, and other factors. SoFi does not sell annuity products.

How an Annuity Works: The Basics

When purchasing an annuity, you (the account holder) might pay a lump sum premium, or make a series of premium payments over time to build up the value of the policy.

Sometimes, the funds within an IRA or 401(k) can be used to purchase an annuity or pay annuity premiums, when the annuity is held within one of those qualified retirement accounts.

After this accumulation phase, the company begins making regular income payments. This is known as annuitization. The annuity holder can decide, as part of the annuity contract, exactly when payments will begin and how long the distribution phase will last.

For example, you might structure your annuity payments over 10 years, or you might set up guaranteed payments for the rest of your life. The annuity terms and fees depend on the structure of the distribution phase.

The Surrender Period

Money paid into the annuity typically can’t be withdrawn for a certain amount of time without owing a stiff penalty; this is called the surrender period and those terms, and any exceptions, are set by your insurance company.

Again, annuities generally have different rules about early withdrawals, but during the surrender period taking a withdrawal could incur a 7% penalty, in addition to a potential 10% penalty if you’re under 59 ½.

Your choice of annuity will influence your withdrawal options.

Types of Annuities

There are many types of annuities you might choose from to support your financial goals in retirement.

Fixed and Variable Annuities

A primary consideration when selecting an annuity is whether your money earns a steady rate of interest, which is the hallmark of a fixed annuity, or whether it’s invested in underlying assets and tied to market performance to some degree (e.g., via mutual funds or index funds). This would create a variable income stream.

• Fixed annuities offer a guaranteed minimum income benefit (or GMIB) for a set period.

• Variable annuities generate returns based on the performance of underlying investments and the rate of return is not guaranteed.

Within these two branches, fixed and variable annuities, there are other categories.

Other Annuity Categories

• Immediate. When you buy an immediate annuity, you fund it with a lump sum and payouts to you can begin in as little as one year.

• Deferred. Deferred-income annuities can be funded with a lump sum or multiple smaller payments, and payouts to you can begin several years after the purchase.

• Indexed. Indexed annuities generate a rate of return that’s based on the performance of an underlying stock market index, such as the S&P 500.

It’s not unusual to see these terms combined. For example, you might purchase an immediate fixed annuity or deferred variable annuity, based on your needs.

Withdrawal Options for Annuities

The two main considerations here are: First, whether you’re over the age of 59 ½ and second whether you’re still within the surrender period. For example, if you’re younger than 59 ½, and thus taking an early withdrawal, that would trigger a 10% penalty — similar to taking an early withdrawal from an IRA.

The penalty would be steeper if the early withdrawal was also within the surrender period.

If You’re Not Taking an Early Withdrawal

If you’re over 59 ½ and past the surrender period, you would be able to take a withdrawal without a penalty, but you would owe ordinary income tax on the earnings portion of the withdrawal.

If your annuity is held within a 401(k) or tax-deferred IRA account, you would owe tax on the full amount of the withdrawal.

Bear in mind that state regulations may also come into play.

• Partial surrender. If your annuity has not yet been annuitized, meaning your regular payments have not begun, you may be able to make a partial surrender of its value to withdraw cash.

• Full surrender. You could opt to make a full surrender instead if you no longer need the annuity. A surrender fee may apply to partial or full surrenders, and you typically have only a few years after purchasing the annuity to exercise either option.

• Periodic payments. You might have the option to take recurring payments from your annuity, separate from the amounts you’re entitled to receive once the contract has been annuitized.

A 1035 exchange is another option if you’d like to have an annuity but aren’t happy with your current one

Early Withdrawal Penalties

The IRS imposes a 10% early withdrawal penalty when you take money from tax-advantaged accounts before age 59 ½. That rule extends to annuities held within an IRA, unless you qualify for an exception.

For example, you could avoid the penalty if you’re making an early withdrawal because you:

• Become totally and permanently disabled

• Plan to use the money to fund a birth or adoption, higher education expenses, or the purchase of a first home

• Are subject to an IRS levy

• Have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income

If you’re subject to a 10% early withdrawal penalty on top of income tax, on top of surrender charges that could quickly make an early withdrawal from an annuity expensive.

Required Minimum Distributions (RMDs)

Required minimum distributions or RMDs are amounts you’re required to withdraw from certain retirement accounts, typically beginning at age 73. The amount you’re expected to withdraw is based on your account value, age, and life expectancy, as established by the IRS.

Qualified accounts, including qualified annuities, are subject to these rules under the Internal Revenue Code. If you have a qualified annuity and do not begin taking RMDs on time, you could be hit with a penalty. The penalty is equal to 25% of the amount you were required to withdraw.

IRA annuity withdrawal rules allow you to skip RMDs if you have a Roth account. However, if someone inherits a Roth IRA annuity from you, they would be subject to RMDs.

Factors to Consider Before Withdrawing

Rather than asking, Can I withdraw all my money from an annuity? the better question may be whether you should tap your annuity early. There are advantages and disadvantages to weigh before making a move.

Impacts on Lifetime Income Stream

If you plan to withdraw money from an annuity early, ask yourself what that might mean later if you’re relying on that income for retirement. Taking money from your annuity now can affect its growth, potentially leaving you with smaller payments later on.

You’d have to consider how smaller payments might affect your broader retirement picture. For example, if your payouts would shrink from $2,000 per month to $1,200 per month, would you be able to make up the gap with other retirement savings or Social Security benefits?

If not, then you may need to rethink your early withdrawal plans. This retirement planning guide offers more tips on how to plan your income strategy.

You can also use a retirement calculator to estimate what you’ll need.

Surrender Charges and Fees

Annuity companies may let you take money from an annuity early but they don’t allow you to do it for free. You may have to pay a surrender fee, which can eat into your withdrawal amount. For example, if you’re taking out $20,000 and the surrender fee is 7%, you’re handing over $1,400 to the annuity company.

Surrender charges may decrease as time goes on, so you might save a little money if you can wait a few years to make a withdrawal. If you’re not thrilled about paying the fees, however, you might consider other ways to access cash.

Alternatives to Withdrawals From an Annuity

If you no longer need your annuity, you could sell some or all of the payments owed to you for cash. The amount you can get will depend on your contract’s current value and the company you’re working with. You’ll need to find a reputable annuity buyer, and you may want to compare offers to find the best deal.

If you want to keep your annuity, you might consider other ways to borrow the cash that you need. Your options may include:

• Selling or cashing out a cash-value life insurance policy you own

• Taking out a home equity loan or line of credit

• Borrowing from your 401(k)

• Taking an early withdrawal from an IRA

• Getting a personal loan or line of credit

Some of these options have more pros and cons than others. Borrowing from your 401(k), for example, can shrink your retirement nest egg and potentially trigger tax penalties if you don’t pay it back on time. Weighing all the possibilities can help you decide on which path to take.

Strategies for Withdrawing from an Annuity

If you’re interested in how to withdraw money from an annuity while minimizing penalties and fees, there are a few things to keep in mind. These tips can help you figure out the best way to withdraw from your annuity.

Annuity Withdrawal Calculators

Annuity withdrawal calculators can help you estimate what you can get from your annuity, should you decide to withdraw early. They can also tell you how much you might owe in taxes and penalties for an early withdrawal.

Seeing the numbers can put the true cost of an early withdrawal in perspective. You might decide that it makes more sense to choose another option if what you’d pay to make the withdrawal outweighs what you’d gain.

Tax Planning and Optimization

The last thing you want is to end up with a surprise tax bill following an early annuity withdrawal. If you know how much you plan to withdraw, consider how that’s going to affect you tax-wise. Specifically, consider whether it would:

• Push you into a higher tax bracket for that tax year

• Trigger a 10% early withdrawal penalty, based on your age

If a withdrawal would bump you into a higher tax bracket, even temporarily, you may need to think about how you could offset it. For example, could you make a tax-deductible contribution to an IRA or a donation to an eligible charity? Or, would it be possible to wait and take the withdrawal next year, if you expect your income to be lower then?

Thinking ahead can help you avoid a situation where you’re stuck with a tax bill you can’t afford.

Consulting a Financial Advisor

Annuities can be complicated products and if you find it challenging to make sense of your contract’s terms or have questions about the tax consequences, it’s probably in your best interest to talk to a financial advisor.

A professional advisor can walk you through your withdrawal options, based on the terms of your annuity contract, and guide you through the potential tax impacts. And if you decide that an annuity withdrawal isn’t right for you, an advisor can suggest other possibilities for getting the cash you need.

The Takeaway

How do you withdraw money from an annuity? With careful thought, if you intend to minimize what you pay in taxes and fees.

If you have an annuity, or you’re thinking of adding one to your financial plan, it’s important to understand what you’re getting and what you might pay if you decide to take cash from your contract early. After all, an annuity is one part of your overall retirement plan — which may include an IRA, a 401(k) or other accounts. Whatever you decide should make sense in light of your other investments.

Help build your nest egg with a SoFi IRA.

🛈 SoFi does not offer annuities to its members, though SoFi Invest offers investments that may provide income through dividends.

FAQ

What is the penalty for withdrawing from an annuity early?

The IRS imposes a 10% early withdrawal penalty when you withdraw money from an annuity before age 59 ½. The withdrawal is also subject to ordinary income tax and you may be required to pay a surrender charge to the annuity company if the withdrawal is during the surrender period.

Can you withdraw the entire annuity balance at once?

As long as your annuity contract permits it you can make a full or partial withdrawal. A full surrender would effectively cancel your contract, while a partial surrender might still allow you to receive annuitized payments later.

How are annuity withdrawals reported for tax purposes?

Withdrawals from qualified annuities are subject to ordinary income tax on the entire withdrawal amount. Nonqualified annuities are subject to income tax only on the earnings withdrawn. Both types of annuities are subject to a 10% early withdrawal penalty when you take money out before age 59 ½, unless an exception applies.

About the author

Rebecca Lake

Photo credit: iStock/Super Scout

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOIN-Q424-003

Feb

2025

What Is a Good 401(k) Expense Ratio?

By David Wolinsky | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A 401(k) plan doesn’t have an expense ratio, per se, but the overall cost of the plan includes the expense ratios of the funds in an investor’s account, as well as other charges like plan administration fees and the like.

With that in mind, generally, the lower the fees for the plan the better, including the expense ratios of the investments in the account, because fees can lower portfolio growth substantially over time. While investors don’t have control over the basic costs of their 401(k) plan, they can opt to choose investments with lower expense ratios, e.g. under 0.50% if possible. On average, 401(k) participants were paying roughly 0.5% of plan assets as of 2021, according to some of the most recent available data as of early 2025.

Key Points

• Understanding and managing 401(k) expense ratios is essential for enhancing retirement savings growth.

• Actively managed funds have higher expense ratios, while passively managed funds have lower ratios.

• Strategies to reduce 401(k) expenses include reading disclosures and evaluating fund options.

• A good 401(k) expense ratio is generally under 0.50%, particularly for passive funds.

• Consider a rollover IRA for potentially lower fees and a broader range of investment options.

What Are Reasonable Fees for a 401(k)?

In passively managed funds (where a portfolio mirrors a market index like the S&P 500), the expense ratio is typically lower as compared to actively managed funds, which might charge between 0.5% and 1.0% or more. Actively managed funds have a fund manager who employs different buying and selling strategies. Generally, this is because more work is being done on the manager’s part in an active strategy vs. a passive strategy.

As noted, 0.5% is more or less an average cost for many participants.

Note, too, that passive strategies generally have expense ratios under 0.50%. Exchange-traded funds (ETFs) usually follow a passive strategy and can have expense ratios under 0.25%.

Expense ratios can vary among plans for a variety of reasons, including how the 401(k) account is managed, the administrative fees, the record-keeping costs, and so on. While investors don’t have any say over the built-in costs of the 401(k) plan — that’s set by the plan administrator and/or your employer — investors can manage their own investment costs.

To determine the amount you’re paying for a 401(k) plan, divide the total plan cost (usually available on your 401(k) statement) by your total investment.

Note that active investing can refer to individual investors, but the philosophy of making trades with the objective of exceeding market returns also drives actively managed funds.

Why Fees Matter

Over time, just one or even half a percentage point could potentially make an impact on a retirement account. That impact could in turn mean the difference between retiring when planned, vs. working a few more years until the overall investment grows. A lower expense ratio could help an investor retain more of the value of their 401(k).

For example, a well-known Government Accountability Office analysis from 2006 found that someone who invests $20,000 every year for 20 years in a 401(k) plan that costs 1.5% per year to operate is likely to end up with 17% less than someone whose plan costs just 0.50%. The analysis concluded that after 20 years, that half a percentage point meant the difference of more than $10,000. Similar studies on the impact of fees have found similar results.

Until relatively recently 401(k) expense ratio information wasn’t public, and even now it can be somewhat difficult to locate.

How to Reduce Your Expense Ratio

Before an investor can attempt to reduce their expense ratio, they need to be familiar with what it is.

Until relatively recently 401(k) expense ratio information was not public, and even now it can be somewhat difficult to locate. In 2007, the Securities and Exchange Commission (SEC) approved an amendment requiring the disclosure of these fees and expenses in mutual fund performance and sales materials.

Today, there are a few ways to get the information — and take action:

• Read the fine print. Look closely at 401(k) participant fee disclosure notices, which participants should receive at least annually with any plan. Or look for the current information in a funder’s prospectus on their website. Building on the 2007 amendment, the DOL introduced a rule in 2012 to improve transparency around the fees and expenses to workers in 401(k) retirement plans.

• Ask outright. Investors seeking more information might also choose to call their fund’s client services number directly to get the most up-to-date information on plan costs. Investors who work with a financial advisor can also ask their advisor for this information, as well as their opinions on these expenses.

◦ Evaluate your funds. It can also be helpful to look at the funds being offered by an employer, provider, or broker to see if there is a similar fund that comes with lower expenses. Investors may be able to find the investments they want at a cheaper price, even within their current 401(k) plan.

For investors whose 401(k) plan is not through a current full-time employer — a common situation when people change jobs — they may want to consider a rollover IRA in order to pay lower fees and gain access to a wider array of investments.

The Takeaway

There’s no magic number that indicates a 401(k) expense ratio is too high or just right, and all plans are different. Under federal law, employers have a fiduciary duty to offer reasonably priced options and to monitor the quality of the 401(k) plan they offer. The more an investor knows about their current plan, the better equipped they are to make compelling arguments for how to improve their plan.

Help build your nest egg with a SoFi IRA.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q125-030