Buzz
When choosing a retirement plan, it's essential to consider your financial goals, the risks associated with different funds, and their long-term performance. Additionally, it's important to track the fees charged by your mutual fund manager—because even small percentages can significantly impact your overall returns.
The primary fee to watch out for is the expense ratio, which is the percentage of your assets taken out each year. 401(k) fees can vary depending on the employer and the funds you pick: Larger employers often have lower fees (under one percent of the account balance) due to managing more assets, while smaller companies may have fees up to two percent due to managing fewer assets. While two percent might not sound like much, over 35 years, it can consume half of your investment returns.
Ian Ayres, a law professor at Yale who researches 401(k) fees, advises against investing in funds with an expense ratio higher than one percent annually. He recommends seeking funds with fees under 0.5 percent per year, though even a 10 basis points (0.1 percent) difference can significantly impact your retirement savings. “Reforms that reduce fees by only ten basis points could save over $4.4 billion each year, and these savings accumulate throughout investors' careers,” Ayres notes. (Ayres also argues that excessive fees are more damaging than a lack of diversification.)
Here are some fees to keep in mind:
12b-1 Fees: These fees cover the costs of advertising, marketing, and distribution, which include commissions for financial advisors who recommend the funds. (This is a good moment to review the Fiduciary Rule.)
Administrative Fees: These fees are used to cover the expenses of account statements, educational materials, and access to advisors and customer service support.
Investment or Management Fees: These are the fees for managing your investments and will likely be the largest costs you incur. They are typically smaller for passively-managed index funds compared to actively-managed funds.
Loads: These fees are assessed when you buy or sell shares of a fund and are paid to intermediaries. Front-end loads are charged upfront when purchasing shares, while back-end loads are assessed when selling shares. These are separate from your expense ratio.
Service Charges: These can vary by plan sponsor. For example, a fee may apply if you take out a loan from your 401(k). These fees are not included in your expense ratio.
To discover what your fund charges, check the fee table in the fund’s prospectus under “Shareholder Fees.” Other indirect costs can be found under “Annual Fund Operating Expenses” in the same document. Your corporate plan sponsor is required to disclose this information to you quarterly, thanks to a 2012 regulation by the Department of Labor.
You can explore your employer’s plan options on BrightScope or check individual fund details on Kiplinger’s website. Additionally, you can find more information about fees on the Securities and Exchange Commission’s website. While it may not be the most thrilling way to spend your evening, taking time to understand the fees you're paying could save you significant money in the long run.
