A difference of 1% in fees could reduce an investors balance at retirement by as much as 28%, according to the Department of Labor.
Thats the case for a 401(k) participant who has 35 years until retirement and a current account balance of $25,000, the Department of Labor's data indicated . Assuming investment returns average 7% for those 35 years, this employees account balance will grow to $227,000 at retirement, without further contributions, if fees and expenses are 0.5% per year, but only to $163,000 if those fees and expenses are 1.5%.
Turning those numbers around, reducing investment fees from 1.5% to 0.5% increases the account balance by 39%, according to the Department of Labor. According to the American Savings Education Council, the costs advisors and clients should look for:
Investment Fees. These are usually the largest component of 401(k) fees and expenses; theyre commonly netted against investment earnings. This number typically is the sum of three costs:
- Management fees, which are the costs associated with managing the actual investments;
- Distribution and/or service (12b-1) fees for marketing or servicing individual accounts; and
- "Other" expenses, which might include outlays for recordkeeping, statements, toll-free telephone numbers and investment advice.
All of these investment fees should be listed in the individual mutual fund prospectuses, or in disclosures from the 401(k) plan.
Plan administration fees. These refer to the costs of the day-to-day operation of the plan, including maintaining the individual accounts, staffing a customer support desk, providing an Internet site with plan information, and conducting investment education seminars. These fees may be displayed on a clients statement as a separate charge or netted against the investment earnings of the clients account, or both, ASEC noted.
Individual Service Fees. ASEC added that there may be such fees associated with optional features offered under a 401(k) plan, such as the costs associated with processing a participant loan, or for making an in-service distribution.
Naturally, advisors should urge clients to contribute at least as much as necessary to get the maximum employer 401(k) match, if one is offered. Beyond matched contributions, advisors can go over a 401(k) plans fee schedule with clients; if the fees are high, that can lead to a discussion about whether the tax benefits justify unmatched contributions, or if other retirement vehicles should be considered.