To save now is better than not saving at all. My friend experienced higher fees when using Scottrade versus Fidelity, so now he prefers Fidelity. I would choose index annuities no admin fees versus so many fees in a 401k or other investments. Choose index funds over mutual funds to cut fees and be smart by finding the comparisons among all these investments and savings.
Market risks are also inherent in 401k, variable annuities, variable UL, real estate, pensions and stocks. Consider admin fees of 3% on your mutual funds over the course of 20 years would amount to 60% of your money or savings. Consider 40% income tax bracket during withdrawal stage versus 20%. Tax free retirement savings using IUL is more favorable when your income tax bracket is higher during withdrawal.
In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account which will reduce your retirement income. The following example demonstrates how fees and expenses can impact your account.
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 percent and fees and expenses reduce your average returns by 0.5 percent, 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 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
In recent years, there has been a dramatic increase in the number of investment options typically offered under 401(k) plans as well as the level and types of services provided to participants. These changes give today’s employees who direct their 401(k) investments greater opportunity than ever before to affect their retirement savings. As a participant you may welcome the variety of investment options and the additional services, but you may not be aware of their cost. As shown above, the cumulative effect of the fees and expenses on your retirement savings can be substantial.
You should be aware that your employer also has a specific obligation to consider the fees and expenses paid by your plan. ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of the plan participants and their beneficiaries. Among other things, this means that employers must:
- Establish a prudent process for selecting investment options and service providers;
- Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided;
- Select investment options that are prudent and adequately diversified;
- Disclose plan, investment and fee information to participants to make informed decisions regarding their investment options under the plan; and
- Monitor investment options and service providers once selected to see that they continue to be appropriate choices.
What are 401(k) Plan Fees and Who Pays for Them?
If you want to know how fees affect your retirement savings, you will need to know about the different types of fees and expenses and the different ways in which they are charged.
401(k) plan fees and expenses generally fall into three categories:
Plan Administration Fees – The day-to-day operation of a 401(k) plan involves expenses for basic administrative services — such as plan recordkeeping, accounting, legal and trustee services — that are necessary for administering the plan as a whole. Today, a 401(k) plan also may offer a host of additional services, such as telephone voice-response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation and online transactions.
In some instances, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. Otherwise, if administrative costs are separately charged, they will be borne either by your employer or charged directly against the assets of the plan. When paid directly by the plan, administrative fees are either allocated among participants’ individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account. Either way, generally the more services provided, the higher the fees.
Investment Fees – By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted. (See below for more information on investment-related fees)
Individual Service Fees – In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a 401(k) plan. Individual service fees are charged separately to the accounts of participants who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.
401(k) plan investments and services may be provided through a variety of arrangements:
Employers may directly provide, or separately negotiate with and hire different providers for, some or all of the various services and investment options offered under their 401(k) plans (sometimes referred to as an unbundled arrangement). The expenses of each provider (i.e., investment manager, trustee, recordkeeper, communications firm) are charged separately.
In many plans, some or all of the various services and investment options may be offered by one provider for a fee paid to that provider (sometimes referred to as a bundled arrangement). The provider will then pay out of that fee any other service providers that it may have contracted with to provide the services.
Some plans may use an arrangement that combines a single provider for certain services, such as administrative services, with a number of providers for investment options.
Regardless of the arrangement used, fees need to be evaluated, keeping in mind the cost of all covered services.
What Fees are Associated with My Investment Choices in a 401(k) Plan?
Apart from fees charged for administration of the plan itself, there are three basic types of fees that may be charged in connection with investment options in a 401(k) plan. These fees, which can be referred to by different terms, include:
- Sales charges (also known as loads or commissions). These are transaction costs for buying and selling of shares. They may be computed in different ways, depending upon the particular investment product.
- Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment products that require significant management, research and monitoring services generally will have higher fees. (See below)
- Other fees. This category covers services, such as recordkeeping, furnishing statements, toll-free telephone numbers and investment advice, involved in the day-to-day management of investment products. They may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.
In addition, there are some fees that are unique to specific types of investments. Following are brief descriptions of some of the more common investments offered under 401(k) plans and explanations of some of the different terminology or unique fees associated with them.
Some Common Investments and Related Fees
Most investments offered under 401(k) plans today pool the money of a large number of individual investors. Pooling money makes it possible for individual participants to diversify investments, to benefit from economies of scale and to lower their transaction costs. These funds may invest in stocks, bonds, real estate and other investments. Larger plans, by virtue of their size, are more likely to pool investments on their own — for example, by using a separate account held with a financial institution. Smaller plans generally invest in commingled pooled investment vehicles offered by financial institutions. Generally, investment-related fees, usually charged as a percentage of assets invested, are paid by the participant.
Mutual Funds – Mutual funds pool and invest the money of many people. Each investor owns shares in the mutual fund that represent a part of the mutual fund’s holdings. The portfolio of securities held by a mutual fund is managed by a professional investment adviser following a specific investment policy. In addition to investment management and administration fees, you may find these fees:
- Some mutual funds assess sales charges (see above for a discussion of sales charges). These charges may be paid when you invest in a fund (known as a front-end load) or when you sell shares (known as a back-end load, deferred sales charge or redemption fee). A front-end load is deducted up front and, therefore, reduces the amount of your initial investment. A back-end load is determined by how long you keep your investment. There are various types of back-end loads, including some which decrease and eventually disappear over time. A back-end load is paid when the shares are sold (i.e., if you decide to sell a fund share when a back-end load is in effect, you will be charged the load).
- Mutual funds also may charge what are known as Rule 12b-1 fees, which are ongoing fees paid out of fund assets. Rule 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors and to pay various service providers of a 401(k) plan pursuant to a bundled services arrangement. Some mutual funds may be advertised as “no-load” funds. This can mean that there is no front- or back-end load. However, there may be a 12b-1 fee.
- Target date retirement funds, which are often mutual funds, hold stocks, bonds, and cash investments. These funds are designed to make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time. Target date funds may charge different fees even with the same target date. If a target date fund invests in other mutual funds (often called a “fund-of-funds”), fees may be charged by both the target date fund and the other funds.
Collective Investment Funds – A collective investment fund is a trust fund managed by a bank or trust company that pools investments of 401(k) plans and other similar investors. Each investor has a proportionate interest in the trust fund assets. For example, if a collective investment fund holds $10 million in assets and your investment in the fund is $10,000, you have a 0.1 percent interest in the fund. Like mutual funds, collective investment funds may have different investment objectives. There are investment management and administrative fees associated with a collective investment fund.
Variable Annuities – Insurance companies frequently offer a range of investment options for 401(k) plans through a group variable annuity contract between an insurance company and an employer on behalf of a plan. The variable annuity contract “wraps” around investment options, often a number of mutual funds. Participants select from among the investment options offered, and the returns to their individual accounts vary with their choice of investments. Variable annuities also include one or more insurance elements, which are not present in other investment options. Generally, these elements include an annuity feature, interest and expense guarantees and any death benefit provided during the term of the contract. In addition to investment management fees and administration fees, you may find these fees:
- Insurance-related charges are associated with investment options that include an insurance component. They include items such as sales expenses, mortality risk charges and the cost of issuing and administering contracts.
- Surrender and transfer charges are fees an insurance company may charge when an employer terminates a contract (in other words, withdraws the plan’s investment) before the term of the contract expires or if you withdraw an amount from the contract. This fee may be imposed if these events occur before the expiration of a stated period, and commonly decrease and disappear over time. It is similar to an early withdrawal penalty on a bank certificate of deposit or to a back-end load or redemption fee charged by some mutual funds.
Stable Value Funds – A common investment option that generally includes fixed income securities and one or more contracts issued by banks or insurance companies that provide protection of contributions invested (the principal) and accumulated interest, as well as a rate of return that may be fixed, linked to an index, or reset periodically based on the performance of the fund’s investments. These funds may have investment management and other administrative fees associated with their operation.
While the investments described above are common, 401(k) plans also may offer other investments which are not described here (such as employer securities).
