Workers usually cringe or ignore employer mailings about retirement plans. It’s complicated, boring reading and who has time to decipher that legal jargon? Not reading your notices may cost you.
Chances are, your employer offers you a benefit like a 401(k) or 403(b) retirement plan. This is a retirement savings plan where employees may choose to set aside some of their paycheck (usually before taxes) every year. Your employer may match what you put in, which makes this a good way to save for retirement.
Many think plans are free
In your plan, you choose what investments to buy – likely from a list of funds your employer provides you. Your investments in these retirement plans cost something, in the form of fees. Payment of those fees is either absorbed by the employer or passed through to employees. By law, your employer is required to ensure the plans are fair and open to all employees, which means extra recordkeeping and administrative costs. Your employer must list:
- investment-related fees (this is generally the most significant fee)
- plan-related fees (recordkeeping and administrative expenses)
- fees and expenses (amounts actually charged to participants)
Who really pays the fees for your plan?
Many employees assume their retirement plan is a free benefit and there are no fees. That is not a good assumption. Just because you are not billed for fees or you don’t write a check to pay fees does not mean there are none. Someone is administering the plan, so someone is getting paid, right?
The firm your employer uses to administer the company retirement plan (the sponsor) must provide plan information annually so you can compare fees and expenses. You should see the rate of return on your plan’s investments for the year, as well as for 5 years and 10 years. You can also see if your employer paid the plan fees for you or passed them to you. This is important.
The Investment Company Institute (ICI) shows participants/employees typically pay the majority of plan fees in the form of investment expense ratios. For example, an ICI survey of 117 employers representing 130 plans revealed the median fee for plans was about $350/participant for accounts totaling $48,522 (which was the median participant’s average balance).
Think fees won’t matter much?
Over time, fees shrink your nest egg. Even a seemingly small .5% difference will impact your wealth. Here’s a good example:
Say you can invest $10,000 in Fund A with a fee of .5%/year, OR in Fund B with 1.5%/year and both funds grow 8% annually before expenses? (It is your choice on which fund to pick.)
After 10 years, an investment in Fund A is worth about $2,100 more. After 20 years, it’s worth almost $10,000 more. Would that matter to you?
The above chart from the SEC’s investor education site, shows how fees add up over time.