Fees, Fees, and More 401(k) Fees
By: Source: AARP.org Date Posted: 2007-08-10 13:30:00-04:00
Most people don't know that they pay fees for their 401(k) plan. In fact, an AARP survey indicates that nearly two out of three people aren't aware that they pay any fees for their plan. With most plans you have to look really hard to find out who gets paid how much, and you certainly don't get a monthly bill.
But don't let that fool you. You do pay a cost for your 401(k) plan. The fees can add up and detract from making the most of your retirement nest egg.
Types of Fees
Most fees fit into these general categories:
- Investment Fees—the largest bite comes from fees you pay to the mutual fund companies that manage the investments.
- Administrative Fees—operational expenses paid to your plan administrator such as record keeping, account services, accounting and legal services.
- Individual Fees—for optional, individual services such as taking out a loan, hardship withdrawal or wire transfer of money.
Don't Let Fees Get you Down
AARP is working hard for legislative and regulatory changes to lower 401(k) plan fees. We also want your plan to give you clear, simple information about the fees you pay. There are limits to what you can do about fees. In the meantime, here are some things you can do to minimize their impact on your retirement savings.
- Consider No-Load Mutual Funds—Most plans offer several mutual funds to choose from. Select no-load mutual funds—they don't charge a sales commission. That way more of your money is invested and working for you.
- Compare Fees—Mutual funds charge management fees as a percentage of the assets invested in a fund. This is called an expense ratio. Choose funds with a low expense ratio. For example, say that you can choose between two similar funds. Fund A has an expense ratio of .50, and Fund B has an expense ratio of 1.30. Let's say you start with $10,000, both funds average an 8% return, and you hold it for ten years. As the chart below shows, your money will grow much faster with Fund A.
Fund Fund A Fund B $ Invested $10,000 $10,000 Rate of Return 8% 8% Expense Ratio .50 1.30 $ After 10 Years $20,534 $18,941
It may seem that fees don't really matter, but this chart shows the dramatic difference even a small change can make. Of course, the comparison of fees comes after you have first decided how you want to invest your funds (i.e., large company stocks, international stocks, etc.). - Consider Index Funds—Index funds are composed of stocks that mirror a particular stock index, such as the Standard & Poor 500 Index of large companies. They generally have lower fees than actively managed funds because less stock trading and management oversight is required. Index funds are a good option if they are offered in your plan.
- Do your Homework—Find out about the fees in your plan. Be sure to review your account statement, the fund prospectuses, and your plan's summary plan description (SPD) to learn about fees.
- Talk to the HR Folks—If your plan charges high fees or contains high-cost mutual funds, talk to your HR department. Ask them to review your 401(k) plan and consider switching to another plan. If enough employees request it, maybe they will listen.
- Avoid Individual Fees—Unless you are facing a real emergency, don't borrow money from your account. You will be charged additional fees for special services such as loans and wire transfers. Your retirement account is for retirement—don't sabotage yourself.
With 401(k) plans, you are in the driver's seat. You have to make the investment decisions. Make good choices and keep fees to a minimum.
Take Action
Compare Mutual Fund Fees
Use this tool to compare mutual fund fees in your plan.
AARP Resources
Low Fees
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401(k) Fee Survey
Find out what consumers know (or don't know) about plan fees.
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