Hidden Fees In Your 401(k) & How To Catch Them

401(k) Plans are probably one of the most popular ways most Americans save for their retirement. Yet, successfully using a 401(k) plan requires a vast amount of knowledge of investment opportunities, types of plans, knowledge of risk and awareness of costs associated with maintaining your plan. About seven people in ten (71%) are not even aware that they are paying certain fees to their plan provider to maintain their account. Which, in my opinion are then called "hidden fees". Lack of knowledge of what an investor pays in 401(k) fees could cause to add up to tremendous amounts of money over the years.

For example. For an employee who has been working for about 35 years and contributes an estimated $5,000 per year to his/her plan with an annual return of seven percent and no fees, their plan would earn about $469,000 over that 35 year period. However, with an annual fee of 1.5% of the account balance, the employee would only earn $345,000 in that same 35-year period. In reality, fees could sometimes be less and sometimes even more. If this small of a percentage can do such damage of 35 years I'd say it's worth looking into. Especially if you're trying to safe as much money as possible for your retirement. These are your hard earned moneys and even though the financial world has become more and more complicated over the years, we should always make time to educate ourselves how to save more money. In this case while saving for retirement. 

Let's have a closer look at how we can figure out where we could find some fees in our own 401(k) plans. First I'll give you a little checklist that you can use to spot possible fees when working with your 401(k) plan.

401(k) Fees Checklist

  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 options 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 a participant loan program and insurance coverage?
  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)?
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This small list is only the beginning of this educational process. You should always ask questions about everything and educate yourself about these investments. Monitoring your current investment selections and reviewing the investment options offered under your plan are part of a process that you will need to undertake continually if you wish to stay up to date and monitor your 401(k) plan.

The law requires that fees charged to a 401(k) plan are “reasonable” rather than setting a specific level of fees that are permissible. The reasonableness of fees have to be determined in each case.

401(k) Plan fees and expenses usually fall into 3 categories:

Plan Administration Fees

The day-to-day operation of a 401(k) plan involves expenses for basic administrative services. These operating expenses could include record keeping, accounting, legal and trustee services, etc. These are mostly necessary for administering the plan as a whole. There could also be other fees such as telephone voice-response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation and online transactions.

In some instances, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. This is why you are going to have to start paying attention to all of these things. They'll try to get to you by not just charging you a bill, but by deducting a certain percentage of your returns. In general, the more services provided, the higher the fees. 

Investment Fees

By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You have to pay attention to these fees. You again pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted.

Individual Service Fees 

In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under your 401(k) plan. Individual service fees are charged separately to the accounts of participants who choose to take advantage of a specific plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.

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What Fees are Associated with Investment Choices in a 401(k) Plan?

Apart from fees charged for administration of the plan itself, there are three basic types of fees that may be charged in connection with investment options in a 401(k) plan. These fees, which can be referred to by different terms, include:

  • Sales charges (also known as loads or commissions). These are transaction costs for buying and selling of shares. They may be computed in different ways, depending upon the particular investment product.
  • Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund.
  • Other fees. This category covers services, such as recordkeeping, furnishing statements, toll-free telephone numbers and investment advice, involved in the day-to-day management of investment products. They may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.

There are also some fees that are unique to specific types of investments.

Where Can You Get Information about the Fees and Expenses Charged to Your 401(k) Plan Account?

If you have questions about the fees and expenses charged to your 401(k) plan, review the following documents shown below or contact your plan administrator directly.

The following information is available from your plan:

  • If you direct the investments in your account, your plan will provide information about your rights and responsibilities under the plan related to directing your investments. This includes plan and investment-related information, including information about fees and expenses, that you need to make informed decisions about the management of your account. 
  • Your 401(k) plan’s summary plan description (SPD) will tell you what the plan provides and how it operates. It may tell you the investments offered by your plan, the fees and expenses paid by the plan, and how those expenses are allocated among plan participants. 
  • The plan’s annual report (Form 5500 series) contains information regarding the plan’s assets, liabilities, income and expenses and shows the aggregate administrative fees and other expenses paid by the plan. However, it will not show expenses deducted from investment results or fees and expenses paid by your individual account.

If, after doing your own analysis, you have questions regarding the rates of return or fees of your plan’s investment options, ask your plan administrator for an explanation.

What Other Factors Might Impact the Fees and Expenses of My 401(k) Plan?

  • Funds that are “actively managed” (i.e., funds with an investment adviser who continually researches, monitors and actively trades the holdings of the fund to seek a higher return than the market) generally have higher fees. The higher fees are associated with the more active management provided and sales charges from the higher level of trading activity. 
  • Funds that are “passively managed” generally have lower management fees. Passively managed funds seek to obtain the investment results of an established market index, such as the Standard and Poor’s 500, by duplicating the holdings included in the index. 
  • If the services and investment options under your plan are offered through a bundled program, then some or all of the costs of plan services may not be separately charged to the plan or to your employer. For example, these costs possibly may be subsidized by the asset-based fees charged on investments. 
  • Plans with more total assets may be able to lower fees by using special funds or classes of stock in funds, which generally are sold to larger group investors. “Retail” or “brand name” funds, which are also marketed to individual and small group investors, tend to be listed in the newspaper daily and typically charge higher fees. 
  • Optional features, such as participant loan programs and insurance benefits offered under variable annuity contracts, involve additional costs.
  • Retirement plans, such as 401(k) plans, are group plans. Therefore, your employer may not be able to accommodate each employee’s preferences for investment options or additional services.
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Conclusion

When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs. If your employer has selected a bundled program of services and investments, compare all services received with the total cost. Also remember that higher investment management fees do not necessarily mean better performance. Nor is cheaper necessarily better. Compare the net returns relative to the risks among available investment options. These fees are only one part of the bigger picture including investment risk and returns and the extent and quality of services provided. Keep in mind the importance of diversifying your investments.

What has your experience been with your 401(k) so far? I'd love to hear about it!

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