If you direct your own 401(k) plan investments, you’ll need to consider the investment objectives, the risk and return characteristics, and the performance over time of each investment option offered by your plan in order to make sound investment decisions. Fees and expenses are factors that may affect your investment returns, and therefore impact your retirement income.
Why you should care about plan fees
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.
The following table demonstrates how varying levels of fees and expenses can impact the growth of a hypothetical 401(k) plan account after 35 years, assuming a $25,000 starting balance, 7% annual return before expenses and fees, and no additional contributions.
|Average Annual Fees and Expenses||Ending Balance After 35 Years*|
*These are hypothetical examples and are not intended to reflect the actual performance of any specific investment, nor are they an estimate or guarantee of future value.
How do you learn about your plan’s fees?
The first step is to become informed about the different types of fees and expenses charged by your plan, and the way they are allocated to plan participants. The best way to do this is to study the fee disclosure information that your 401(k) plan provides to you.
By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Your disclosure statement should clearly indicate the total annual operating expenses of each investment option. For example, in the case of a mutual fund, operating expenses may include investment management fees and 12b-1 fees. These fees are charged against the assets of the fund and reduce the fund’s total return. The annual operating expenses will be shown both as a percentage of assets (expense ratio) and as a dollar amount for each $1,000 invested. For example, a fund may have an expense ratio of 0.15%, or $1.50 for each $1,000 invested. In this case, $10,000 invested in the fund would cost $15.00 annually (10 times $1.50).
Your plan’s disclosure material will also describe any shareholder-type (transaction) fees that apply to each investment option–things like sales charges and loads, withdrawal fees and surrender charges, and fees to transfer between investment options.
Your plan must also provide a chart that lets you easily compare information about each investment option. For example, if your plan allows you to choose among different mutual funds (or from different families of mutual funds), the difference in fees and expenses may help you choose between two or more funds that are otherwise similar in performance and investment strategy. (Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.)
The day-to-day operation of a 401(k) plan also involves expenses for basic services–plan record keeping, accounting, legal and trustee services–that are necessary for administering the plan as a whole. Sometimes employers pay these expenses. Sometimes they’re paid by the plan, and either allocated to all participants in proportion to account balances (that is, participants with larger accounts pay more of the allocated expenses) or charged as a flat fee to each participant’s account. Your fee disclosure should contain an explanation of any fees and expenses that may be charged to participants’ accounts. You’ll also receive an explanation of any fees and expenses that may be charged to your individual account–for example, fees for taking out a loan or processing a qualified domestic relations order.
Remember that fees and expenses are just one factor to consider when choosing an investment for your 401(k) plan account. You’ll also need to consider a fund’s investment performance in relation to the fees charged. However, all things being equal, minimizing the fees and expenses you pay to your 401(k) plan may help you increase your retirement nest egg–so be informed and review all your options carefully.
For more information, see Department of Labor Publication “A Look at 401(k) Plan Fees” at www.dol.gov.
Copyright 2006-Broadridge Investor Communication Solutions, Inc. All rights reserved.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Coastal Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
CFS representatives do not provide tax or legal guidance. For such guidance please consult with a qualified professional. Information shown is for general illustration purposes and does not predict or depict the performance of any investment or strategy. Past performance does not guarantee future results.
Trust Services are available through MEMBERS Trust Company. CFS* is not affiliated with Members Trust Company.