Published by Micah Schmidt,
If you are like many workers in the Unites States, your employer offers a defined contribution plan such as a 401(k) or 403(b) as a part of the benefits package. As you look to direct how investments are made within your account, it is important to consider all fees involved along with investment performance to determine the best allocation choice for you. For the purposed of this post we will concentrate on fees charged and how they can impact your retirement.
The first item to consider when looking at retirement plan fees is the plan’s administration fees. These fees pay for the day-to-day operation of the plan, and generally account for recordkeeping, legal and trustee services required under the Department of Labor. Plan administration fees generally fluctuate with the size of a company’s plan where larger plans pay lower fees as a percent of the total assets. Like many fees, these can be either paid by the company sponsoring the plan or the participants directly. To understand how your plan is structured, request a copy of your plan’s summary description from your human resources/benefits department.
The second type of fee to consider is investment fees. These fees are directly associated with the investment options offered by your plan. Investment fees include the expense ratio along with front/back end loads associated with the mutual fund or exchange traded fund in your plans investment line-up. This type of fee is the one you as a participant have the most control over. A recent example on how fees can impact your retirement provided by the Department of Labor is as follows:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.50% to 6.5%, your account balance will grow to $227,000 at retirement even if there are no further contributions to your account. If fees and expenses are 1.5%, reducing your return to 5.5%, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.
A reduction of this magnitude may have a material impact on your retirement. Just because fees are low does not mean the plan is better nor do high fees make it worse. It is suggested you do complete research when selecting which investment option(s) are right for you while considering the costs involved.
After reading this you may be thinking, “My employer is required to consider my plan’s fees!” If this is your thought process, you are correct. Plan sponsors (i.e. your employer) are required to establish a process to evaluate the fees charged to the plan and plan participants and determine if the fees are reasonable in light of services provided by the plan. Your plan sponsor also must select an investment line-up that is adequately diversified. Although your plan is required to monitor these items, it is up to you as a participant to understand what fees your plan charges and how you benefit from these fees. In some cases, you may not benefit from the fees that are charged. In this case, raise your concern with your company’s benefits department so you can obtain additional information.
In summary, to better understand what fees your plan charges and how they are charged ask the following questions:
- What investment options are offered under my plan and what are the fees involved?
- Does my plan pay administration expenses?
- What types of services does my plan offer that I do not take advantage of?
Do your research and consider the costs of your plan. And remember, consult your wealth advisor with any questions regarding your retirement plan and overall financial goals.