Understanding 401K Fees

We have touched on 401k fees in various articles because they are one of the most misunderstood parts of 401k plans. Understanding your employer fees and as well as your financial advisor’s fees is just as important as all the fees associated with the investments themselves. Fees can alter your investment strategy and the allocation of your investment portfolio. They also alter the returns you can expect by your retirement target date. Just as you are responsible for various fees, so are your employers so be sure you get full disclosure. Most fees come directly out of your assets. You can check your account statement, annual report or the summary plan for all the information regarding fees. Below are 4 kinds of fees associated with 401k plans.

1.General Fund Management Fees
Managing the 401k is the most costly aspect of the plan. These fees are for the management of the funds and are usually automatically deducted. They will be detailed on your statements and can take the form sales charges (front-load/back-load), transfer charges, insurance charges and generic management fees for the funds.

2.12b-1 Fees
12b-1 fees are also paid directly out of your mutual funds assets. These fees are used to advertise the fund as well as compensate financial advisors. These fees can range anywhere from 0.25% to 1% annually. There has been pressure from the Securities and Exchange Commission (SEC) to make these fees more transparent instead of just “12b-1” fees. Regardless, those charges are there and will affect your bottom line.

3.401k Plan Administrative Fees
These fees cover the plans daily operation and include legal fees, accounting fees, customer service, training and other activities. These fees can be either deducted from your plan’s assets or will be separately covered by your employer. They also correlate with the amount of service you receive. If your company offers a lot of training and service, then you will most likely be paying for it one way or another. Make sure to speak with your company and learn their strategy for administrative fees.

4.Hidden Costs
This may sound broad but due to agreements between fund companies and providers you never know what you might be paying for in your plan. Study your statements closely since these can be very difficult to notice being that it is already difficult enough to decipher the other fees. Many companies have revenue sharing agreements, think of it as I will scratch your back if you scratch mine. Some companies will push you into certain funds for specific kickbacks from the fund companies themselves. This is why staying educated is so important.

While there are plenty of fees that can fall into these larger categories the bottom line is to stay educated and vigilant. So many people lose earning potential because they do not understand the true costs of their 401k. Compare your services and your costs to always make sure you get what you are paying for from your 401k and can plan for a good retirement.

For more information on 401k investment advice click here.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.