Millions of hard-working Americans sock away a percentage of their salaries into employer-sponsored 401(k) plans each year in order to prepare for retirement. The widespread popularity of these plans has led to a substantial improvement in both the investment selection and money management features offered inside these plans over the past 20 years. However, the costs and fees of these plans have also risen commensurately during that time. But many of these expenses are coming under increased scrutiny by the SEC and other regulatory authorities such as FINRA and Congress in recent years. Some industry pundits say that these fees are too high, while others maintain that the majority of plan participants have little or no idea that many of these fees even exist, let alone what they are being charged for or how much they are really paying. (For related reading, also check out Is Your 401(k) Administrator Competent?)
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Here are some of the common fees found in many 401(k) plans:
Plan Administrative Fees
Most 401(k) plans charge some sort of annual administrative fee to their participants. This fee typically ranges from $35-50 per year and is usually assessed either quarterly or annually.
This fee is usually passed along by the providers of the mutual funds that the participants can choose from within the plan. This fee can run anywhere from 15-25 basis points up to 1% of assets in some cases. They are used to cover a variety of mutual fund administration costs, such as fund portfolio management, marketing and advertising, and other miscellaneous expenses.
Money Management Fees
Some 401(k) plans are managed directly by professional money managers or Registered Investment Advisers who actively manage the participants' money by trading securities. These managers usually charge a percentage of assets out of the plan each year, which is assessed out of each participant's account on a pro-rata basis, typically on either a quarterly or annual basis.
Mutual Fund Sales Charges
Plans that invest directly in open-end mutual funds will typically offer A, B and C shares for all fund offerings. Class A shares charge a percentage of assets invested up front (typically 3-5%), while B shares charge higher 12b-1 fees, but nothing up front. However, they have a back-end sales charge schedule that declines to zero after a several years. Class C shares are usually the most expense laden class of share offered. Annual fees are typically high, and typically if the shares are sold within a year of purchase there will be a back-end load. (To learn more, see Stop Paying High Mutual Fund Fees.)
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Variable Annuity Contract Expenses
Many 401(k) plans are funded entirely with variable annuity contracts that offer a range of mutual fund subaccounts within the contract. These contracts have their own set of fees that closely match those found in other types of 401(k) plans, including:
- Annual Contract Maintenance fees - These may be charged on top of the fee charged by the 401(k) plan administrator, and are usually between $40 - $100 per year.
- 12b-1 fees - Similar to those charged in plans that do not offer variable annuity contracts, usually about 0.25-1% per year.
- Mortality and Expense fees – To cover the costs of some of the insurance benefits within the plan, these can be as high as 1.5% per year.
- Cost of Riders – Many contracts offer special riders that provide specific living or death benefits that may be purchased on top of the standard benefits of the contract, and can range from 0.5% to 1.5% per year.
When these fees are totaled, they can easily equal 2-3% of a given participant's plan balance each year. Furthermore, these fees are usually assessed regardless of whether the account value rises or falls, and either reduce the returns posted by the vehicles the plan is invested in or else reduce the absolute value of the account. Therefore a worker who has $10,000 invested in a typical growth stock mutual fund inside his or her 401(k) plan could pay an administrative fee of $50 each year, plus 12b-1 fees of perhaps 0.75% per year, plus a 4.75% sales charge assessed by the fund within the plan.
The Bottom Line
Many workers are largely unaware of the various fees that their plans charge them or what the fees are for. For more information on the fees that your plan is charging you, contact your financial advisor, plan custodian or administrator, or your HR department. (For more information, see Bear Spray For Your 401(k).)
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