Understand Your 401k Plan & Fees

Your employer may have recently informed you about changes to the company retirement plan. Don’t remember? Not paying attention to those notices can cost you.

 

Bor-ing! Do you typically ignore those small-print, periodic notices your employer sends about “minor changes” and fees for your retirement plan or pension? That stuff is just so complicated and confusing…and who has time to sort through legal jargon anyway?

So…..you’ll do it later??? Not!

It’s not easy to wade through, but here’s the gist:  Any company with a retirement plan (aka a plan sponsor) must spell out fees for its employees (plan participants) because the law now requires record keepers and broker dealers to do that. Providers of 401(k) plans and some 403(b) plans must notify you – the participant – so you can make informed decisions or change your mind.

But it’s up to you to read through the stuff and make your changes by the deadline. That’s where many of us get caught – we put the notice in the “to do” pile and miss the deadline. Worse yet, many employees procrastinate so much they don’t even sign up to participate in the retirement plan at work and leave money on the table. Ouch!

What’s This?

A 401(k) or 403(b) is a tax-advantaged savings plan where you can save for retirement. Many employers will sponsor such a plan for their workers, who must sign up if they want to be part of the plan. To participate, you set aside some of your pay, usually before it’s taxed, in this “retirement” plan.

Then, you choose from a menu (usually a list is offered) of investment products to buy, depending on whether you want your account to be conservative, aggressive or somewhere in between. Some plans have a couple of choices, while others may have a dozen or more. Often, an employer will “match” the employee’s contribution, up to a certain amount annually.

The law requires employers to ensure the plans are fair and open to all employees, which means extra recordkeeping and administrative work. Payment for that work is either absorbed by your employer or passed onto you, the employee.

But you swear your company 401k is a free service? It’s not. Either your employer or you are paying, maybe both of you. The plan sponsor (employer) is required to let you know about fees, and will list:

  • Investment-related fees (generally the most significant fee item paid)
  • Plan-related fees (recordkeeping/administrative expenses)
  • Fees and expenses actually charged to participants

Why You Should Care

Over time, these fees add up and shrink your nest egg. Even a .5% difference greatly impacts your nest egg.

For example: Your plan may let you invest $10,000 in

  • Option #1 (fund that charges .5% a year) or
  • Option #2 (a fund that charges 1.5% a year).

And…both options grow at 8% annually (before expenses), so it’s a toss-up, you say?

Nope. After 10 years, #1 is worth about $2,100 more. After 20 years, #1 is worth almost $10,000 more. That small fee made a big difference, didn’t it?

Retirement plan sponsors must provide investment updates annually so you can compare fees and expenses of your options. This means you should be able to check the rate of return on any or all of the plan’s investments for a year, as well as for 5 years and 10 years. You should also be able to see if your employer paid for the plan fees or passed them to you. If not, ask!

Employers can show fees in a chart developed by the U.S. Department of Labor, which includes mutual funds, bank collective investment funds, insurance annuity products, funds of funds, and asset allocation portfolios.

According to the Investment Company Institute (ICI), participants (employees) typically pay the majority of plan fees in the form of investment expense ratios. An ICI survey of 117 employers representing 130 plans revealed that the median fee for the plans was .72% of assets, or about $350/participant for accounts totaling $48,522 (the median participant’s average balance).

What’s the Difference?

According to a recent survey from J.P. Morgan Asset Management, there’s “an increased realization that employees don’t understand savings, investments or how much they will need in retirement.” Fees are a big part of the confusion.

This graph from the U.S. Securities and Exchange Commission shows how investment fees can take a bite out of your nest egg. Wouldn’t you rather have all your money working for you?  Then check that latest notice your employer sent and see if there’s a way keep more of your hard-earned contributions working for you.

SEC chart

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