So, what’s the deal with fees and 401(k)s? Why should you bother to think about them? Well, fees are one of the factors that will affect your retirement account. To put it simply, the higher the fees, the less money you will have for retirement. Figuring out how much in fees you are paying for your 401(k) plan is a must!
Your 401(k) May Be Your Only Hope
Your 401(k) is important to your retirement because generally, those liquid assets are what you’ll have to live on (aside from Social Security, pensions, or other income you may have) during retirement. A 401(k) gives you tax advantages that other accounts don’t have, which can result in a higher account balance for you.
When you make contributions to your account, you’re doing your part to increase your retirement savings. However, many plans charge you extra fees and expenses, with or without your knowledge.
Those fees and expenses reduce your portfolio growth over time—sometimes substantially—which means that you’ll end up with a lower retirement balance.
So, yes, fees are important to think about. They may not seem like a big deal now, but they add up over time, affecting your retirement savings.
Here’s an example of how this works:
In this particular example, there ends up being a $16,159.16 difference between the two accounts. You’ll have more money in Account 1, with a 0.5% fee, than in Account 2, with a 1.5% fee.
Fees do make a difference, and you should consider them when deciding where to invest your retirement money.
*This particular example does not take into account additional contributions, employer contributions, contribution rates, and federal and state taxes.
What type of fees are hidden in my retirement accounts?
Not all fees are created equal. There are different types of fees for plan administration, investment, and individual services.
Plan Administration Fees
These fees pay for the day-to-day operations of the plan (e.g., recordkeeping, accounting, and other services). Fees are charged and paid for in one of three ways:
- Some are covered by the investment fees (explained below) that are deducted from returns before they hit your account (for example, a revenue share of 0.25%).
- Some are charged as an additional expense out of participant accounts, either as a percentage of assets or a flat fee (for example, $50 annually per participant deducted from participant account).
- Some are charged directly to the employer as a flat fee (for example, a $1000 annual maintenance fee).
You could be paying for these fees, or none at all, depending on your plan details. Make sure you know how much your plan administration fees are and what they’re used for. You can find your plan administration fees in your plan’s fee disclosure, which is required to be provided to you every year.
If you have a Guideline 401(k), the plan administration fees are charged directly to your employer. You don’t pay any part of the plan fees! How wonderful is that?
Investment fees are the fees associated with managing plan investments. They’re generally charged as a percentage of your assets in your account (usually deducted directly from your investment returns by the investment company ‒ for example, a 0.75% mutual fund expense ratio).
Some 401(k) plans may have investment managers that charge an additional fee against assets.
At Guideline, you won’t have to worry about these fees. All of our investment advice is included in the plan administration fee mentioned above that’s charged to the Plan Sponsor. In other words, you won’t have to pay for this directly from your account. So keep on saving!
Individual Service Fees
In addition to the fees mentioned above, there may be individual service fees associated with optional features (loans, withdrawals, etc.) under a 401(k) plan that you may use. These fees are charged directly to you as a flat fee, should you decide to take advantage of the feature or service (for example, a $50 distribution fee or $75 loan maintenance fee).
Guideline has a list of all these fees in the fee disclosure, so make sure you read it!
What types of investment fees do I pay for mutual funds?
There are three basic types of fees associated with investment options in a 401(k) plan that may be charged: sales charges, management fees, and other fees.
These charges (a.k.a. commissions or a “load”) are paid to a broker for buying and/or selling your investment. They are calculated in different ways, depending on the investment.
Mutual funds can have front-end or back-end (redemption) charges, charged as a flat fee or as a percentage of assets.
Guideline specifically uses only “no-load” mutual funds (meaning there’s no commission or sales charge), so you can avoid these fees. We’ve got your back.
These fees are ongoing charges for managing investments in the funds. They are usually charged as a percentage of assets. This is the “expense ratio” you normally see on a fee disclosure.
Guideline uses passively-managed index funds in its managed portfolios that specifically keeps these costs as low as possible, while still delivering quality investment management.
Passively-managed funds usually mirror the securities that are comprised of a market index, like the S&P 500. Since these funds require less management, they usually come at a lower cost than their active counterparts.
In comparison, actively managed funds generally adjust their portfolio composition, based on research on both current market conditions and individual company performance. They may also compare their own performance against a specific index as a benchmark to beat.
These may include fees for recordkeeping, statements, advertising, etc. They can be charged as a flat fee or as a percentage of assets.
As an example: Mutual funds may charge a 12b-1 fee (which is generally the cost of advertising the fund) as an ongoing fee paid out of fund assets. The fee can also be used to pay broker commissions and other costs of promoting the fund. Be careful with this, because some “no-load” mutual funds may still charge you a fee for the same purpose, but in a different way.
Where can I get fee information for my plan?
You can get the fee information by clicking on each investment on the participant dashboard. You can also check out the Summary Plan Description (SPD) or our Fee Disclosure. Alternatively, these fees are listed in the summary annual report.