The Quarter Roll
"No more worry."

“Get your 401(k) statement in the mail, and OPEN IT!” Money Magazine

fees are a side of 401(k) retirement accounts that fund representatives haven’t talked about enough401(k) accounts have long been touted as one of the best retirement tools working people have at their disposal. Participation in a 401(k) means you can deposit money before paying income tax on it, thus allowing more money to grow into your retirement nest egg. One particular reason 401(k) accounts are attractive is the benefit of your employer matching your contributions. The amount matched by employers, who offer such a benefit, can vary. However, no one can argue against any amount of free money! Between pre-tax contributions, employer matching, and professional management of your retirement fund, what could be better? Unfortunately, there is another side to 401(k) accounts that fund representatives haven't typically talked about in their informational sign up meetings.

401(k) Fees
Recently, a new law was passed and set to go into effect in July 2011, regarding the disclosure of fees associated with your 401(k) account. In the past fund managers have not been required to provide a detailed explanation of fees and you wouldn’t find them listed on your quarterly statement, even if you knew to look for them. While some prospectuses and fund fact sheets do list the fees associated with the account there hasn’t been an explanation that can educate someone on how the fees work.
(“401k fees exposed – finally”, Stacy Johnson, MSN Smart Spending)
 
Here are a list of some of the fees you may see associated with your account:
Gross Expense Ratio:
the fee amount that could have been charged.
Net Expense Ratio: what was charged minus any discounts.
12b-1 fee: the fee that goes to the investment company (the company who manages your fund). Investment companies stated that this money is used for the expenses they incur to pay the account manager, provide continuing education, and meeting with clients (such as your HR department).
Other expenses: administrative costs incurred to manage the fund.

While these fees are not out of the ordinary, they do have an impact on your account growth that has not been well publicized. From MSN’s Money Central: “Employees are often unaware that the mutual funds held within work-related voluntary retirement plans charge management and other fees. That's because the costs are often deducted from fund earnings rather than disclosed separately.”

Even though the net expense ratio is expressed as a percentage, it is a fee. In the case of Sally, a customer service representative for a Pittsburgh based retailer, it added up to 1.18%. This fee is not itemized on her online or paper account statement. She also noted that each year when the advisors come in to discuss 401(k) investing with employees, these fees were not explained or even mentioned. (Continue reading below.)

 

Here is why understanding these fees is important. If Sally’s account statement said she lost 5% for the quarter she actually only lost 3.82% since the 5% also includes the 1.18% fee. If her statement says she earned 5% she actually earned 6.18%, but 1.18% of her fund’s value was taken as a “net expense ratio” fee.
fees are a side of 401(k) retirement accounts that fund representatives haven’t talked about enoughHow a 1% 401(k) fee really equals 28%
Consider this example quoted in the article “Cracking Down On 401(k) Fees” by Sharon Epperson on the CNBC website: "Assume you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent." Have you asked your HR Department or Plan Advisor what your net expense ratio is?

Additional 401(k) Fees
There will also be a third party involved in your 401(k) transactions, in addition to your plan advisor and your employer. This third party administrator may host the website that provides you account information, keep records regarding your account, and handles such administrative tasks like dispersing funds for retirement, mailing statements, or facilitating hardship loan paperwork. These third parties will often charge “incidental” or transaction fees, such as a dispersement fee or check fee, when you conduct withdrawal or transferring business on your account.

More hits on 401k growth
As demonstrated in the CNBC example, fees can reduce or stunt your accounts growth. However, there are other factors that can work against your 401(k) as well.

Loss of employer match: During the Great Recession many employers started trimming benefits with items that didn’t have an immediate hurtful impact on wages. One of the first benefits on the table was 401(k) matching. Without an employer’s matching contribution the luster of a 401(k) account starts to fade, as there are other retirement investments you can contribute to that allow you to take a tax deduction, such as a traditional IRA account.

Hardship withdrawals and loans: Another effect of the recession was a sharp increase in 401(k) hardship withdrawals and loans. Money withdrawn from a 401(k) account, even for hardships, is subject to tax and a 10% penalty. If your income is decreasing and your employer’s matching benefit is gone, you may need to reevaluate the amount you are investing for retirement if financial hardship is on the horizon.
(Fidelity: 401(k) hardship withdrawals and loans are up, David Pitt, USA Today Online)

Loss of account value: Many retirement accounts, hit by a failing economy in 2008 and 2009 had their values reduced 30-50%. That lost value could take many years to recoup. Even when the value of your account drops, fees are still deducted from the account each year, producing a double negative hit.

Substandard investment management: Not all funds are created equal. How does your investment match up to others? Peggy M., commenting on a Smart Spending article regarding disclosure of 401(k) fees, said she put 3% of her paycheck into a 401(k) fund for 12 years and had accumulated almost no gains. Brightscope.com provides an online tool that allows you to compare your company’s 401(k) plan to the plans of other companies. How does your match up?
(www.Brightscope.com)
(“401k fees exposed – finally”, Stacy Johnson, MSN Smart Spending)


Considerations
If you are investing in a 401(k) retirement plan find out what fees are deducted from your account each year. If your employer is still matching your contributions a 401(k) investment is tough to beat. However, if you are an employee who has lost that benefit, you should reevaluate your 401(k) investment with the questions listed below, for example. 

Has your fund gained or lost value over the last 5 years? How does your fund’s performance and fees compare to other options you may have? Are you financially in a position to invest in a retirement account right now, or should that money go to other pressing needs, such as medical bills, high interest debt, or housing?

Even with the new disclosure laws set to begin soon, take the time to educate yourself on the true costs of your 401(k) and other options you may have. Having all the information available to you allows you to make the best decisions for your future.