The 401 (K) Fees You Need to Know About
When choosing a retirement plan for investment, you need to consider your purpose, the risks associated with various funds, and how these funds work in the long term. But you also need to keep track of the fees charged by your mutual fund manager – even seemingly insignificant interest rates can have a huge impact on your bottom line.
The base fee is your expense ratio , which is a percentage of your assets deducted for each fiscal year. These fees for 401 (k) plans will vary depending on your employer and the funds you choose: funds offered by larger employers tend to have lower fees (below one percent of the account balance) because more assets are managed in general. while smaller firms may offer funds with commissions of up to two percent to offset lower asset levels. And while the 2% commission may not sound like a lot, it can eat up half of your 35-year earnings .
Ian Ayres, a Yale law professor who studies 401 (k) fees , says you shouldn’t invest in any funds that charge an expense ratio of more than one percent per year. Look for funds that charge less than 0.5 percent per year instead, but know that even 10 basis points (or 0.1 percent) can make a big difference to your retirement savings. “Reforms that reduce investor fees by an average of just ten basis points will generate more than $ 4.4 billion in savings annually, and these savings increase over the course of an investor’s career,” Ayres writes. (Another note: Ayres believes that overcharging is more detrimental than lack of diversification.)
Here are some of the fees to be aware of:
- 12b-1 Fees . These fees relate to advertising, marketing, and distribution costs, which include commissions for fund-recommending finance professionals. (This is a good time to be reminded to read about the fiduciary rule .)
- Administration Fees : These fees cover the costs of account statements and training materials, as well as access to consultants and customer service representatives.
- Investment or management fees : These are charged to manage your investment and are likely to be the largest fees you pay. For passively managed index funds, they will be lower than for actively managed funds.
- Loads : These commissions are charged for buying or selling shares of a fund and paid to intermediaries. There are external loads that are paid upfront when you buy a stock, and internal loads that are charged when you see a stock. They are not included in your expense ratio.
- Service Fees: This will vary depending on the sponsor of the plan, but an example is fees associated with obtaining a loan from your 401 (k) if the need arises. They are not included in your expense ratio.
If you are unsure how much your fund charges, you can find information in the commission table in the fund’s prospectus under the heading Shareholder fees, and other indirect costs can be found in your fund’s prospectus under the heading Annual Fund Operations. Costs. “The corporate plan sponsor is required to disclose this information to you on a quarterly basis in accordance with a 2012 Department of Labor rule.
You may be able to find your employer’s plan options on BrightScope, or information on individual funds on the Kiplinger’s website, and in addition to inquire about additional fees on the Securities and Exchange Commission website . While taking the time to figure out what fees are charged to you is not the most fun way to spend an evening, it can save you tons of money.