If you’re like many Americans, you make regular contributions to your retirement plan at work. Whether you’re enrolled in a 401(k), 403(b), 457, or Thrift Savings Plan, you’re probably also responsible for managing how your contributions are invested. And you’re the one who has to evaluate how these investments align with your goals.
While you can control the amount of money you contribute and how it’s invested, there’s one area you may not have much control over: your plan’s fees and expenses. Why is this important? While contributions to your account and the earnings on your investments can increase your retirement income, your plan’s fees and expenses can decrease your return.
Fees and expenses for retirement plans generally fall into three categories:
Plan administration fees.
It costs money to run a 401(k) plan. Someone needs to pay for basic administrative services, including recordkeeping, accounting, and trustee work. These expenses may be paid with fees taken from your account. In some cases, your employer may pay these fees, or they may be charged against other assets in the employer’s plan.
These can often be the biggest expense in a retirement plan. These fees are associated with the individual investments that you’ve chosen for your account, and vary for each investment option. Common investment fees include sales loads and management fees. These fees are deducted from your account, so they directly impact the net performance of your investments.
Management fees and other investment-related services are typically charged as a percentage of the money you’ve invested. Your plan administrator should provide you with a description of any expenses charged against your account.
Individual service fees.
If you use optional features in your plan, you may have to pay additional service fees. For example, if you take a loan from your account, a loan fee may be deducted from your account value.
Why should I care?
Here’s an example of how the expenses can affect your savings. If you have a balance of $10,000 and make no additional contributions, you could have more than $90,000 in your account after 35 years if you average 7% in returns (less average fees of .5%). But if your average annual fees were 1 percentage point more (1.5%), your ending balance would be a little more than $65,000 — a difference of nearly $25,000. That’s more than a 25% difference. Fees matter!
What should I do next?
Get clear on the costs associated with your plan, and how they may be impacting your account. For more information about the fees and expenses in your plan, check out the summary plan description (or “SPD”) you received when you enrolled. It includes information on your plan’s services and how it operates. Some SPDs spell out which administrative expenses you pay and which your employer pays. It may also detail how employee-paid expenses are allocated among plan participants.
Any plan that lets you to choose your own investments must also provide you with detailed investment information when you first enroll and annually after that. This disclosure is often titled “Plan and investment-related information,” and is meant to help you compare the investment options in your plan. It typically includes a chart that shows historical investment performance, expenses, and fees for each option in the plan. The Employee Benefits Security Administration (EBSA) has provided a guide to help you understand what to look for in this important document.
As you research the potential impact of your plan’s fees on your retirement income, it’s worth remembering that nothing worthwhile is free. Make sure your review includes all the services you’re receiving — you want to be sure the value you’re receiving is in line with the costs. Consider the scope and quality of services being provided in addition to the fees.
Finally, don’t let fees alone drive your investment decisions. You need to consider your risk tolerance, timeline, and overall asset allocation in addition to fees and performance history. Higher investment management fees don’t automatically translate to better returns, just as lower fees don’t mean a fund is the right one to suit your needs.
Still not sure what to do? Contact your plan administrator with questions about the fees and expenses charged to your plan, or consider getting professional investment help for your retirement accounts.