If you participate in your company’s 401(k) plan, you have received, or will be receiving, a notice from your employer that provides disclosure information about the plan’s investment options, their performance history, and fees and expenses that are paid from the participant’s accounts.
The biggest expense item for most plans is the investment expenses, typically in the form of mutual fund expense ratios. Other expenses may include costs of administration or the charges of the plan’s investment adviser if these are paid by you the participant out of plan assets.
These disclosures are based upon the Department of Labor’s new rules that went into effect this year. The timing couldn’t be better, as several recent articles have highlighted surveys pointing out that a significant number of 401(k) plan participants think that there are no fees or charges associated with their 401(k). Clearly, nobody would provide these services for free.
I am a huge fan of disclosure and transparency in all things related to retirement plans. For far too long, some providers and other plan vendors have been less than forthcoming to plan sponsors as well as the plan participants. Disclosure was not required.
While disclosure is wonderful and this effort is a great start, the reality is that many plan participants will receive the disclosure materials and not read them. They are not all that user friendly and lack any meaningful basis of comparison. However, I still do suggest that you look this report over.
Plan administration and other services are not free. In many cases, these fees will not appear on the disclosure statements you receive. Some plan sponsors write a check from company (as opposed to plan) assets to cover the costs of record keeping and administration, as well as the fees paid to the plan’s investment adviser. In many cases, these fees are deducted from the participants’ accounts and they will appear in aggregate by category on a future quarterly statement as a deduction from your account balance. While you might not have a means to compare these fees against a benchmark, you should still review these items. If you have questions and/or the fees seem excessive, ask your company’s plan administrator to explain them.
Much has been written about the importance of low investment expenses. I couldn’t agree more. That said, picking Fund A vs. Fund B solely because the expenses are lower is not a good practice in my opinion. Fund performance versus a benchmark is provided in the report. Beyond this, I suggest doing some research with third-party information providers such as Morningstar to fully understand how each mutual fund invests.
Deloitte and the Investment Company Institute conduct a periodic study of 401(k) plans, including the fees. Based on their 2009 study, the median expense ratio for investment options by asset class across the plans surveyed was:
- Equity: 0.77%
- Fixed Income: 0.44%
- Money Market: 0.42%
- GICs and Stable Value: 0.34%
- Target Date: 0.68%
- Balanced: 0.60%
- Lifestyle: 0.57%
The results varied widely based on factors such as the size of the plan, average participant balance, and other factors. Smaller plans may not have access to some of the lower-cost share classes or other types of investment options available to larger plan sponsors.
The study also looked at the “all-in” costs of plans and found a very wide range. This includes the investment expenses mentioned above and plan items such as investment advice and administration. The range here is from a median of 0.35 percent for the best 10 percent of the plans surveyed to 1.72 percent for the most expensive 10 percent of those plans. Typically, larger plans with high average participant balances will tend to be the least expensive.
The point here is not to make you a 401(k) expert but rather to urge you to be an aware 401(k) investor. Just as with investments in your own brokerage or IRA account, you need to understand all aspects of your 401(k) investments. For many, this will be their primary retirement accumulation vehicle, and as such your account deserves your attention.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.