ScardeyCatGuide to the 401(k) - Part 5: Hidden Costs Stealing Your Retirement

Investing and management fees have certainly come down since the 2008 financial crisis, but what many people have not realized is even the best-managed 401(k) plans still have considerable administrative costs and fees associated with them today.

Some of the fees charged are reasonable, such as the actual cost for preparing tax documents. Other fees are a bit ridiculous though – fees that any other business would take into their overall operating budget, such as advertising expenses.

The reality is fees on 401(k) plans and investment options within them are very confusing. The good news is we will demystify them in this chapter so you can focus on those that can be cut down.

First we need to get a basic understanding of the types of fees within your 401(k) plan.

• Plan Administration Fees • Individual Services Fees • Investment Management Fees

Plan administration Fees

These are the fees paid to the financial institution managing your 401(k) plan. Plan administration fees cover general management like record-keeping, accounting, legal and trustee services. It also contributes to any additional services that you may have access to, like customer service representatives or educational seminars.

Individual Service Fees

These are fees you opt into. They are charged separately to your account when you take advantage of them. Using financial advisory services would be an example.

Investment Management Fees

The investment firms that operate mutual funds and other selections available in your 401(k) plan charge fees for management, trading and reporting. The costs are often shown as a percentage of total assets or more commonly as an expense ratio.

Of the three fees - Investment Management is the largest portion of your 401(k) costs and will be our main focus when covering ways to reduce your fees.

READING YOUR FEES

To start, you will normally find one of the below fees listed on your 401(k) statement or annual fee disclosure:

• “Total Asset-Based Fees”
• “Total Operating Expenses as a %”
• “Expense Ratio”

Expense ratio is used most often and is defined as the total percentage of fund assets used for operating expenses. Regardless of the label used, this is the main “price tag” plan managers want you to see. The issue is it does not tell the whole story.

Expense ratios only include ongoing costs, such as management and administration fees. Basically it is just the costs that are a set percentage of assets held in your account. There are many other transactional charges and annual fees that linger outside of the main price tag that will impact your overall account costs.

Expense Ratio

People often get confused by expense ratios because they are used to display the cost of many different accounts and investments. Your 401(k) account has an expense ratio, which as mentioned earlier represents your “total fees.”

Mutual funds also have an expense ratio that shows you the cost of owning that individual fund. The expense ratio of a mutual fund you invest in factors into the total cost of your 401(k) fees.

The fees on mutual funds and plans can vary, which is why expense ratios are worth reviewing.
Here’s the rub - the average 401(k) expense ratio is 0.50 to 0.75% these days. At first blush that seems rather cheap and likely a reason people do not dig deeper.

Some plans fall below the average range while others are higher, even creeping up near 2%. Anything above 1% is too high for current industry standards.

Usually, larger the plan lower the expense ratio. If you work for a large employer expect to see a lower end expense ratio, if not then you may want to have a chat with the human resources department.

With plan expense ratios sitting sub 1% on average, why, according to a recent study by the Center for American Progress did the average all-in cost for plan participants come out 2.22%?

What you need to focus on is the total cost of each investment you select within your 401(k). Transactional fees and account charges outside of the expense ratio can add up in a hurry.

Investing in mutual funds with lower cost structures is the easiest way to keep more money in your account working for you.

In the next post we will breakdown the mutual fund fees so you know which to lookout for an eliminate.