A look at 401k fees – What are they and why should you consider them?
When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs. Fees and expenses are one of the factors that will affect your investment returns and impact your retirement income.
Why consider 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 which will reduce your retirement income.
What are 401(k) plan fees and who pays for them?
If you want to know how fees affect your retirement savings, you 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 and necessary administrative services, such as plan recordkeeping, accounting, legal, and trustee services
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.
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.
What fees are associated with my investment choices in a 401(k) plan?
Apart from plan administration fees, there are three basic types of fees that may be charged in connection with 401(k) plan investment options. 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.
- 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.
- 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.
Distribution fees include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.
Shareholder Service Fees are fees paid to persons to respond to investor inquiries and provide investors with information about their investments. Shareholder service fees can also be paid outside of 12b-1 fees.
What are 12b-1 Fees?
These are fees paid out of mutual fund or ETF assets to cover the costs of distribution – marketing and selling mutual fund shares – and sometimes to cover the costs of providing shareholder services.
The 12b-1 fees get their name from the SEC rule that authorizes a fund to charge them. The rule permits a fund to pay these fees out of fund assets only if the fund has adopted a plan (“12b-1 plan”) authorizing their payment.
How much is the average 12b-1 fee?
The 12b-1 fee doesn’t have a set standard amount, but they range from 0.25% (for the service fee alone) to a maximum of 1% of the average net fund assets per year. That might not sound like a lot, but over time it can add up to a significant chunk of change.
About CMR & Associates + PolicySmart®
CMR & Associates’ risk management consultants provide independent group benefits, retirement and insurance advice by reviewing your current plans to improve coverage and reduce cost. Through CMR’s proprietary database – The CMR Database® (comprised of some 13,000 brokers and specialists globally), we maximize access to the insurance and retirement industry for greater options that will translate to better coverage and lower cost.
Please email CMR & Associates or call 877-447-4301 or 212-447-4300 for more information.