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401(k) fees
What you may not know.
The cost of your investments can determine how well those investments
actually do for you. And often, what is considered to be a good deal from
one angle, can be entirely different when seen under a different light. The
differences in your overall return can be huge and the costs of those
investments can eat the biggest chunk of those returns.
Fees and expenses can be a drag on your personal wealth in ways you
probably hadn't imagined. A plan that charges you 0.5% in expenses would
gain you 28% more in retirement income that a similar plan that charges 1.5%.
First off, let's discuss what those fees are. Your 401(k) will always have
administrative costs. These fees are directly related to the services that
the plan offers. Basic record keeping, accounting, legal and trustee
services all cost money. Add to that some of the additional services
offered by many plans such as access to a customer service representative,
electronic access to plan information, telephone voice response systems,
educational seminars, retirement planning software, investment advice,
daily valuation and on-line transactions. These all cost more money but are
considered by the large majority of 401(k) plan participants as necessary.
Although many people who pay for these services take little advantage of them.
How are all these perks paid? Sometimes it is deducted from investment
returns. Or they are paid by the employer. Often they are charged against
the plan itself which divvies the cost among participants in a variety of
ways. The most common ways allocate the cost based on the amount in each
individuals account, with those with large balances paying additional fees.
Sometimes the plan simply issues a flat fee charge against all accounts
equally. Your 401(k) is not a free ride when it comes to quality service.
The more first class your plan's service is, the higher the fees.
Then they sneak in the investment fees. You know that you will have to pay
them, but you can almost never easily find out exactly what they are. They
are deducted directly from you investment return for management services.
If you have taken a loan against your 401(k), these fees will also be
assessed as something for individual services. Some plans have implemented
fees for folks who choose to trade more actively than the plan would like.
Some additional fees are added to the mix in the form of the investment
choices you make. Most often, the plan allows you to invest in mutual
funds. These pools of investors also have fees for their services. Found
most often in their prospectuses
, the variety of fees
can range widely depending on the
type of fund(s) you choose. Contacting your plan administrator should get
you this information. Your account statement may show the administrative
costs and will always show you how your plan did, where you are invested,
and the total assets of your account. You should be able to ask for a
Summary Plan Description that will further discuss how and by whom the
expenses are paid. Be sure to read the annual report. If you don't know
how, chances are you are paying for a service somewhere along the line that
will explain it to you.
Things to remember about 401(k) plans.
Actively managed funds cost more. Passively managed funds generally cost
less. Large groups with large asset pools may have lower fees. Almost
always, optional features attached to the plan always cost more. And
because you are investing as a group, you shouldn't expect to have all of
your preferences accommodated.
Here is a checklist of questions to ask yourself as you examine your
employer's plan:
1. What investment options are offered under your company's 401(k) plan?
2. Do you have all available documentation about the investment choices
under your plan and the fees charged to your plan?
3. What types of investment education are available under your plan?
4. What arrangement is used to provide services under your plan (i.e., are
any or all of the services or investment alternatives provided by a single provider)?
5. Do you and other participants use most or all of the optional services
offered under your 401(k) plan, such as participant loan programs and
insurance coverages?
6. If administrative services are paid separately from investment
management fees, are they paid for by the plan, your employer or are they shared?
7. Are the investment options tracking an established market index or is
there a higher level of investment management services being provided?
8. Do any of the investment options under your plan include sales charges
(such as loads or commissions)?
9. Do any of the investment options under your plan include any fees
related to specific investments, such as 12b-1 fees, insurance charges or
surrender fees, and what do they cover?
10. Does your plan offer any special funds or special classes of stock
(generally sold to larger group investors)?
If your employer doesn't offer a retirement plan, suggest that he/she start
one. Simplified plans can be set up by certain employers. For information
on simplified employee pensions, order Internal Revenue Service Publication
590 by calling 1-800-829-3676.
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