I hope you’re enjoying a safe and fun Memorial Day weekend as we remember those who sacrificed with their lives. We sincerely appreciate the service and sacrifices the women and men of the armed forces make every day to help keep us safe.
There’s a little secret associated with your workplace-sponsored retirement plan. Most participants think their plan is free — that it doesn’t cost them anything to join, contribute, and invest. Unfortunately, that’s not entirely true.
While employees typically aren’t charged any out-of-pocket costs to participate in their plans, participants do pay expenses, many of which are difficult to find and even more difficult to calculate. New regulations from the Department of Labor (DOL), which oversees qualified workplace retirement plans, should make it easier for participants to locate and comprehend how much they are paying for the services and benefits they receive.
Here’s a summary of the information you should receive.
1. Investment-related information, including information on each investment’s performance, expense ratios, and fees charged directly to participant accounts. These fees and expenses are typically deducted from your investment returns before the returns (loss or gain) are posted to your account. Previously, they were not itemized on your statement.
2. Plan administrative expenses, including an explanation of fees or expenses not included in the investment fees charged to the participant. These charges can include legal, recordkeeping, or consulting expenses.
3. Individual participant expenses, which details fees charged for services such as loans and investment advice. The new disclosure would also alert participants to charges for any redemption or transfer fees.
4. General plan information, including information regarding the investments in the plan and the participant’s ability to manage their investments. Most of this information is already included in a document called the Summary Plan Description (SPD). Your plan was required to send you an SPD once every five years, now they must send one annually.
These regulations have been hailed by many industry experts as a much-needed step toward helping participants better understand investing in their company-sponsored retirement plans. Why should you take the time to learn more about fees? One very important reason: Understanding expenses could save you thousands of dollars over the long term.
Calculating Fees and Their Impact on Your Account
While fees shouldn’t be your only determinant when selecting investments, costs should be a key consideration of any potential investment opportunity. For example, consider two similar mutual funds. Fund A has an expense ratio of 0.99%, while Fund B has an expense ratio of 1.34%. At first look, a difference of 0.35% doesn’t seem like a big deal. Over time, however, that small sum can add up, as the table below demonstrates.
| Expense ratio | Initial investment | Annual return | Balance after 20 years | Expenses paid to the fund | |
| Fund A | 0.99% | $100,000 | 7% | $317,462 | $37,244 |
| Fund B | 1.34% | $100,000 | 7% | $296,001 | $48,405 |
Over this 20-year time period, Fund B was $11,161 more expensive than Fund A.1 You can perform actual fund-to-fund comparisons for your investments using the FINRA Fund Analyzer.
If you have questions about the fees charged by the investments available through your workplace retirement plan, speak to your plan administrator or human resources department.
When considering whether to roll over your former employer’s 401(k) or other qualified retirement plan to an IRA, keep all these plan fees in mind, in addition to the limited choice of investments in most employer plans. In most cases, the large selection of funds and lower fees at most discount brokerages should tilt the decision towards rolling over your plan when you leave an employer. A fee-only fiduciary advisor can help you evaluate your options and decide whether a rollover is the best choice for you.
If you have any questions about this or any other financial matter, please don’t hesitate to contact us. We are fee-only fiduciary advisers who put your interests first. Not all advisors adhere to this highest standard.
Source/Disclaimer:
1Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Past performance is no guarantee of future results. For more complete information about any mutual fund, including risk, charges, and expenses, please obtain a prospectus. Please read the prospectus carefully before you invest. Call the appropriate mutual fund company for the most recent month-end performance results. Current performance may be lower or higher than the hypothetical performance data quoted. The hypothetical data quoted is for illustrative purposes only and is not indicative of the performance of any actual investments. Investment return and principal value will fluctuate; and shares, when redeemed, may be worth more or less than their original cost.
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