Like many Americans today, I have a 401k fund. It’s neither large nor prosperous, but it’s there. This thought gives me comfort—sometimes. But then other times, I catch myself wondering what, exactly, is the point of a savings fund that seems more active in fee charges than fund deposits. Ten dollars here or twenty dollars there may not seem a lot, but over time those fees cut into the fund's ability to accrue interest over time. This impact can be so critical—especially for savers at the low end of the savings spectrum (a.k.a., me)—that in 2012, the U.S. Department of Labor issued a set of fee guidelines all 401k plan administrators are now required to follow. Not surprisingly, these guidelines also seem rather more obscure than simplified.
In an article titled, 401(k) Fees Still Widely Misunderstood, Forbes magazine reported on how the guidelines have impacted fund-holders' knowledge to date. The truth is, people are still quite confused about how much they pay, how much they should be paying and what (if any) say they have about what they pay in 401k plan fees. So I decided to take matters into my own hands and delved in to do some research. As usual, I found more than I bargained for. I hope what I’m learning will help you crack down on 401k fund fees too!
3 types of 401k plan fees
How fees are assessed:
- Flat fee: As a flat fee assessed at intervals or annually against each participant's account, which means you’ll pay the same no matter what you save or accrue.
- Percentage of assets: As a percentage of assets, which typically means you’ll pay more when you save more.
1. Plan Administration Fees
These are the types of fees that are considered "administrative" in nature:
- Accounting and legal services.
- Trustee services.
- Record keeping services.
- Human resources (fund administrator overhead).
- Fund management seminars and retirement planning software.
- Phone and email customer service and support.
- Access to online investing and real time fund performance and transaction data.
- Online fund management software.
- Small employer funds average total fees around 1.46%.
- Large employer funds average total fees around 1.03%.
2. Investment Fees
These fees are associated with investment activities:
- Sales charges, loads and commissions on sales.
- Fund administration fees (this category often overlaps with "Human Resources" in Plan Administration Fees).
- Investment-related services, including phone and email support, investment advice, investment products education (this category often overlaps with related categories in Plan Administration Fees).
- Small employer funds average total fees around 1.37%.
- Large employer funds average total fees around 1.0%.
3. Individual Service Fees
These fees relate to specialized offerings that can change from plan to plan and employer to employer. Here are some typical fees:
- Fees paid if a plan participant takes a loan against 401k funds.
- Fees paid if a plan participant changes certain investment decisions.
- Fees paid for individualized financial planning assistance.
Tips to save on 401k fees
There are a variety of reasons for why your particular 401k plan may charge the specific fees it charges. For instance, certain fund managers may have made a name for themselves, and their administrative fees (salary, basically) are higher than lesser-known fund managers. Also, certain types of assets come with higher investment fees for making an investment or changing your investment decisions. Be sure to consider the following before investing your hard-earned cash.
Ask these questions
Investment experts encourage 401k plan participants to become "fee savvy" by asking these questions. For employer-sponsored 401k plans, the in-house plan administrator should be able to answer each of these questions for you.
- What is the total annual fee assessed against my account (in flat fee and/or percentage of assets)?
- What does that total annual fee cover (i.e., what do I get for what I’m paying)?
- If I keep this plan until my target retirement date, how much—in total—will fees represent of what I’ve saved?
- Is my fund "actively managed" or "passively managed" (the former usually comes with higher administration fees)?
- How can I lower my fees by changing my investment strategy (i.e., some funds come with higher fees such as loads or commissions—try to avoid these and any specialized investments with additional fee burdens)?
- What value am I getting for the additional individual service fees that I’m paying (i.e. does it cost me more to take a loan against my 401k than what I can hope to recoup)?
- Are administrative and investment fees paid separately or are they bundled into one fee, and can I see a breakdown of all the fees charged to my account, fee by fee with descriptions?
What to shoot for
Kiplinger cites a total fee load of 1% or lower as reasonable for most 401k plans. You also want to be sure that you’re not paying your employer's portion of the total annual plan fees associated with your 401k account. This is more typically an issue if you work for a smaller employer, who may not be able to pick up the costs of plan administration the way a larger company can.
Ultimately, your goal in doing all of this research is to determine if you pay less investing through your employer's plan or by striking out on your own to find an inexpensive, value-rich 401k plan that will safeguard your financial future.
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