If you are eligible for a 401(k) plan at work, you should have recently received a chart including extensive fee and investment information about your retirement account. This new data, required by the Labor Department for the first time this year, can help you to build your retirement savings faster. But you have to locate this booklet in your stack of mail and do a few computations and comparisons to best utilize this new information. Here are some key points to examine on your first 401(k) fee disclosure statement:
Find your fee disclosure statement. The first step in making smarter 401(k) decisions is to locate your 401(k) fee and investment information, which was likely mailed to your home in August. It could be buried in a stack of mail or tucked wherever you tend to squirrel away boring financial documents you don't have time to read. You may be able to request to receive the information via email from your human resources department or 401(k) plan administrator. "These new fee disclosures won't help you if you toss your 401(k) statements in a drawer and don't read them," says Dave Loeper, CEO of Wealthcare Capital Management and author of Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money. "You need to pay attention to the money that is leaving your account and ask questions about who is getting a piece of your retirement savings, and what services you are getting in exchange for it." You certainly aren't alone if you can't find the statement, or upon reading it, walk away feeling confused. A recent online survey of 500 small-business owners by ShareBuilder and Wakefield Research found that only 60 percent recall receiving the new documents, and after an average of 17 minutes reading the information, the majority (83 percent) had additional questions. You'll need to do a few calculations to make the most of the fee report.
Calculate the total cost. Your 401(k) packet will include the annual gross expense ratio of each investment option offered in your 401(k), expressed as both a percentage of the account balance and the dollar cost for each $1,000 invested. For example, let's say your plan documents disclose that a fund has an expense ratio of 0.18 percent, or $1.80 for each $1,000 you have invested. The simplest way to find out how much is being subtracted from your, say, $10,000 invested in the fund is to multiply $1.80 by 10. Alternatively, you could multiply your account balance ($10,000) by the expense ratio divided by 100 (0.0018). Both calculations will tell you that investing $10,000 in this fund will cost you $18 each year.
Fees incurred through your 401(k) can have a dramatic impact on your retirement account balance over the course of your career. For example, a $25,000 401(k) balance that earns a 7 percent annual return and pays a 0.5 percent annual fee will grow to $227,000 over 35 years with no additional contributions. However, if fees and expenses of 1.5 percent annually are subtracted, the account balance will be 28 percent smaller upon retirement, just $163,000.
Factor in shareholder fees. Your new booklet should also include the shareholder fees charged for each investment. These might include a $20 charge for investment balances of less than $10,000, or a 2.25 percent charge on any amount withdrawn within 12 months of purchase. Shareholder fees might also take the form of commissions, sales loads, sales charges, surrender charges, and account fees. Add these to the cost of the investment or make sure you follow the rules to successfully avoid these fees.
Other 401(k) expenses. Your 401(k) fee disclosure pamphlet should also list other fees you could be charged simply for participating in the 401(k) plan, including legal services, accounting, and recordkeeping. It should also list the fees you may incur for taking specific actions, such as initiating a 401(k) plan loan.
Check out investment performance. Fees, while important, are not the only factor you should consider when selecting investments. The average annual return for each investment option will be listed over the past one-, five-, and 10-year periods. "Performance data is important to look at because what it does is to give you a history of each investment option. An investment option might be great today—doing gangbusters—but it is import to look at how it has performed over a period of time," says Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi. But she adds: "The way the fund has performed in the past is really no indication of how it is going to perform in the future."
Compare returns to the benchmark. It's difficult to know if a specific investment is performing well unless you have a standard to compare it to. Listed near each fund on your chart should be a benchmark, which you can compare each fund's investment performance to. For example, let's say an international fund in your 401(k) plan earned an annualized 2.29 percent over 10 years. To decide if that is a solid return, you'll need to compare it to the benchmark for international funds. Borzi compares the benchmark to the world-record line in Olympic swimming competitions. She says: "It's a yardstick that you can use against which you can measure the performance of the individual fund."