Guide to Understanding Fees. in Your 401(k)

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1 Guide to Understanding Fees in Your 401(k)

2 Smart401k will help you to stop guessing about retirement investing and start planning for retirement goals. Our advice includes a list of the most suitable funds for you including a breakdown of the percentage of your money that should go in each fund Improve your retirement planning with tools to keep you on track Work with our advisers to see if you re on track to reach your goals Are you interested in more information about Smart401k? Watch the 30-second Smart401k video.» Guide to Understanding Fees in Your 401(k) By Scott Holsopple Scott Holsopple is the President and CEO of Smart401k, a company offering easy-to-use 401(k) advice for the all levels of investor. Scott makes frequent appearances in the financial media. He s been featured on FOX Business and in USA Today, U.S. News and World Report, The Wall Street Journal and more. Follow Scott on 2

3 Guide to Understanding Fees in Your 401(k) Getting your hands on fee information has been difficult for both plan sponsors (your employer) and plan participants (you). But that s all in the past. Updated regulations require much more fee transparency. Understanding your 401(k) fees is an important part of taking control of your retirement planning. You ll be able to make better decisions about your employer s plan and your entire retirement strategy. Inside Page The Facts Fee Breakdown The Cost to Your Retirement Five Tips to Help with 401(k) Fees (k) Fee Checklist Glossary of Terms Resources For more retirement planning help, visit. This guide will provide you with information about 401(k) fees to help you prepare and make better decisions about your retirement strategy. 3

4 The Facts Retirement plan fees are not new. You ve been paying them all along, even if you didn t know it. You re hearing more about fees now because of new Department of Labor regulations for more fee transparency. Your employer is now required to provide you with detailed fee, plan and investment information to help you understand how much you re paying and what you are paying for. The fees can cover the investments offered through the plan as well as the services you receive, like website access and call center support. Fees keep your plan running, so they are necessary for you to have access to retirement planning options through your work; however, they should be reasonable and fair. All investments come with fees, whether they are through your 401(k), IRA or other outside investments. Because of the new fee transparency regulation, your employer is responsible for providing employees information about fees prior to their first contribution and annually thereafter. In many cases, the fee information will be presented with a quarterly statement. All investments come with fees, whether they are through your 401(k), IRA or other outside investments. The Department of Labor transparency regulations only cover plans offered through your employer, so you will need to be diligent in your research on fees if you plan to invest outside of your 401(k). You can t avoid paying fees altogether, and cheaper isn t always better, but knowing what is being charged can help you avoid unnecessary costs. A 2011 survey found that employees paid an average $248 a year. 1 But plan fees can vary widely depending on the size of the plan, in terms of both participants and assets, and the investments you choose. Plan fees have shown to be as low as 0.2% of assets and as high as 5% of assets According to a 2011 report by Deloitte Consulting LLP for the Investment Company Institute - based on all administrative, recordkeeping and investment fees collected from 520 plan sponsors. 2. According to (8/29/12) 4

5 Fee Breakdown Fees for your 401(k) plan will most likely fall into one of three categories. Plan administrative fees fees charged to keep your plan running can include recordkeeping, legal and/or accounting charges. These fees may or may not be passed along to the individual employees participating in the plan. Investment fees fees covering the management of the investments available in your plan and other investment-related services. Individual service fees fees incurred for optional services offered in the plan (e.g., loan processing). Where s the Money Going? You and your employer pay into the 401(k) plan through administrative fees, investment fees and service fees. The money paid to the 401(k) is distributed to service providers based on the arrangement of your plan. Who Are the Service Providers Fund Managers Manage the money in the specific investments offered through the plan. Recordkeepers Track and maintain individual accounts and ensure all of your contributions and/or distributions are handled properly. Participant Services Could include Web, and phone support, statements, communication materials and the management of other services offered through the plan, like investment advice. Custodian or Trustee A group that either holds or takes fiduciary responsibility for the money in the plan. Plan-level Adviser Works with the plan sponsor to help choose appropriate investments and services for the plan. Your employer can hire and manage each of these operations separately; however, some plans hire one bundled provider to manage all of the services. 5

6 The Cost to Your Retirement Fees can have a large effect on your bottom line. Take a hypothetical situation in which you are 30 years from retirement. In this example, you have a $50, (k) account balance, you are contributing $100/month and you have an average return of 8%. If your fees are 1% of your account, then your account could be worth about $527,822 when you retire 30 years from now. In the exact same scenario, except with fees of 1.5 percent, your account could be worth about $460,208. A 0.5% increase in fees can cost you $67,614 over the 30 years of investment growth. $500,000 $400,000 $300,000 $200,000 1% fees 1.5% fees $100,000 $0 According to a 2011 study, the average total fee paid for administrative and investment services was 1.3% of a participant s account balance. Typically, larger plans have lower fees than smaller plans. The majority of 401(k) account holders come from small plans with less than 100 investors. April United States Government Accountability Office, Report to Congressional Requesters. 401(k) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees 6

7 Five Tips to Help with 401(k) Fees Take note of the management fees and expense ratios for the mutual funds offered in your plan. Remember, comparing the funds from your plan with each other can be like comparing apples to oranges. Compare your plan s funds with other mutual funds in the same asset class. Look at whether the expense ratio for each fund is at the bottom, middle or top of the fund s asset class. Before you jump to the funds with the lowest expense ratios, remember that cost is only one part of fund selection. Compare the fees your plan administrator charges with fees from similarly sized plans. But also consider the services you re receiving. Your administrator may provide easier access, better reporting, friendlier customer service and an investment advice option. Sites like offer plan comparison information. If you re facing distribution fees with every retirement-age distribution, you may want to roll your money to an IRA or your new 401(k) plan if you leave to work elsewhere. It s reasonable to expect your plan sponsor to provide a plan with no-load funds, which are funds without purchase or redemption fees. If that s not the case, speak up. Don t trade too often. Your long-term approach shouldn t necessitate trading often enough to trigger excessive transaction fees. 7

8 401(k) Fee Checklist As you start to evaluate the fees associated with your 401(k) plan, it s a good idea to gather all of the documentation you ll need up front. Here s a checklist to get you started. A list of investment options offered under your company s 401(k) plan Available documentation about the investment options under your plan, including the fees (expressed as expense ratios) A list of investment education and special services offered to you as a participant in the plan Investment option goals is the fund tracking to an index or is it actively managed? List of investment options under the plan that include sales charges (such as loads or commissions) Because what s behind the fees can be as important as the fees themselves, reviewing these materials will better prepare you to evaluate your 401(k) costs. If you need help understanding some of the information you ve gathered or its impact upon your plan s fees, call or the Smart401k adviser team. 8

9 Glossary of Common Fee Terms 12(b)-1 Fees An annual fee for marketing and distributing a mutual fund, considered part of a fund s operating expense. The maximum 12(b)-1 fee allowed is one percent. Administrative Fees Recordkeeping expenses charged by a plan s administrator for the day-to-day operation and to keep the plan running. Distribution Fee Charged when you take a withdrawal or loan from your 401(k) account; these fees could be charged by your plan sponsor, plan administrator and/or plan provider. Expense Ratio Sometimes called the management expense ratio, this is a fraction that expresses the cost of an investment fee: Total expenses to run the mutual fund Expense ratio = Total dollars under management Fiduciary Person(s) that make the investment and service decisions for the 401(k) plan. The U.S. Department of Labor defines a fiduciary as, persons or entities who exercise discretionary control or authority over plan management or plan assets, have discretionary authority or responsibility for the administration of the plan, or provide investment advice to a plan for compensation or have any authority or responsibility to do so. Investment Fees Fees charged for managing plan investments. These fees are deducted straight from your investments returns. Investment fees could include sales charges, also called loads and commissions, management fees and service fees, plus fees associated with specific types of investments. 9

10 Load A percentage of your investment charged by a mutual fund company when you buy or sell that investment. The share class of the mutual fund determines if/when you pay a load as well as the percentage you will pay. For example, a front-end load is charged at the time you purchase the mutual fund and a back-end load is charged at the time you sell the mutual fund. Most mutual fund companies have no-load share class options, which are commonly used in 401(k)-type plans. Management Fees Part of the investment fees, this is an overall fee that mutual fund companies charge all fund shareholders for the research, analysis and maintenance of the fund. Plan Participant A person using and benefiting from the retirement plan. Plan Sponsor (Employer) The person(s) within an organization responsible for administering and maintaining the retirement plan for employees. Because of the discretionary control this person(s) has over the plan, they are also considered a fiduciary. Recordkeeper/ Plan Administrator Handles the daily operations of the plan, processes contributions, calculates returns, provides participant statements and communications and also prepares necessary compliance, legal and regulatory filings for a plan. These functions can be provided by one company or multiple companies performing specific roles, such as recordkeeper, plan custodian, investment adviser, customer service providers, etc. Share Class A classification of investments determining the management fees for the investor. Transaction Fees A fee charged by a plan administrator for trades. Often plan administrators require that participants hold an investment for a certain period of time, during which a transaction fee will be charged; trades are free after that holding period expires. 10

11 Resources United States Government Accountability Office 401(k) Plans, Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees United States Department of Labor A Look at 401k Plan Fees for Employees Online fee comparison site Or visit 11

12 START TAKING CHARGE OF YOUR RETIREMENT INVESTMENTS Smart401k is focused on helping you invest in your retirement plan at work. We create a detailed list of funds for you and recommend how much you should invest in each, all online. This gives you the freedom to plan for your retirement when you want. There are no lengthy meetings to attend, no minimum balance requirements to meet and no uncomfortable sales pitch. This is investment advice the way it should be. Sign up for Smart401k s 30-day free trial, which includes detailed investment advice and access to Investment Advisers. 12