Don't Let 401(k) Fees Sour Your Retirement

Physician's Money Digest, July 2006, Volume 13, Issue 7

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When it comes to your 401(k)plan, more often than not,employees are limited tothe investments selected by theiremployer. According to a report, the fees charged by manyof these funds can take a big chunk outof your account each year. Participantsin large 401(k) plans lose an average of1.07% of their account balance eachyear, while small plan participants payout 1.4% on average. It's not surprisingthat the most expensive plans takeas much as 3% each year.

There's no question that 401(k) plansare expensive to run. With the sophisticatedservices that have been added overthe years, ranging from access to dailyaccount balances to the ability to conductonline transactions, costs haverisen. As costs have risen, employershave shifted much of the financialresponsibility to plan participants.

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There are steps you can take tohelp contain costs, but the burdenfalls on you to request documents andread through the fine print. Contactyour company's benefits departmentor the fund companies directly andask for a prospectus for each of yourfunds. The article suggestsyou start by re-examining theoptions of your 401(k) plan, weighingthe fees as carefully as you wouldinvestment objectives. Little by little,these fees begin to add up.

In the prospectus, you'll find thefund's expense ratio, which is the costto manage your money. Expense ratiosaccount for approximately 90% of theaverage 401(k) participant's costs, andprovide a good benchmark for assessingyour fees. The prospectus shouldalso break down the expense ratiointo three distinct fee categories:investment management, the largestportion of the charges; 12(b)-1, whichcan be as high as 1% and often includesmarketing and distribution fees;and other expenses.

Additionally, some funds charge asubtransfer agent fee to help defrayadministrative costs, which could includebroker fees. Because brokersmay have helped a fund land a spot inyour plan, this practice has led to concernsover conflicts of interest. Thesubtransfer agent fee could be lumpedinto either the 12(b)-1 or "other" category.According to Clark Consulting,the transfer agent fee can amount tobetween 0.25% and 0.65%.

One word of caution:

You may find that the lower costinvestment options include index fundsand the institutional or comingledaccounts that some larger 401(k) plansoffer. Since 401(k) plans are tax-deferred,you won't take a tax hit if you sella profitable holding, so don't be afraidto make a switch if the fee differential isconsiderable. Company stock, though generally free,may leave you dangerously exposed toyour employer's fortunes. Weigh thatoption well when considering your401(k)'s portfolio.