Traditionally the costs associated with investing have been fairly difficult to ascertain. Mutual funds charge expense ratios to pay managers and support staff while custodians and plan administrators also need to be compensated. These costs are deducted from the funds invested in your accounts, but typically the expenses are not itemized on your statement and many investors are unaware they even exist.
A 2011 AARP survey concluded that 71% of 401k participants did not know they were paying for any plan costs. New fee disclosure regulations intend to make these fees more transparent for both employers and employees. The quarterly statement you receive in November should provide new details on the fees deducted from your account. It should explain how the plan works and what fees may be applied in addition to showing the investment options and their corresponding performance and operating expenses.
While many investors are not familiar with the fees in their 401k, the costs associated with these plans are something we monitor closely for all of our clients. Some plans are better than others in terms of investment choices, expense ratios, and administration costs. These are things we take into account when deciding how to allocate investments across accounts and whether to rollover plan balances after retirement or a job change. If you have questions about the new fee disclosures please contact us to review the statements with you.
While you may be able to reduce your investment fees by rolling over a high cost plan after a job change or retirement, what can you do if you are stuck in a high cost plan with your current employer? Even if plan expenses are high, contributing to your 401k is still likely a good savings strategy. Your employer may offer a generous matching program to offset some of the higher costs or there may be a few good mutual fund choices that complement the rest of your portfolio. Putting the spotlight on fees should also pressure plan administrators to examine their offerings more closely. You may also consider contacting your HR department to request lower cost fund offerings.
