Retirement plan fees: What you need to know
By Jean Chatzky, the financial editor for NBC's TODAY Show and an award-winning personal finance journalist, author and speaker.
How much are you paying to invest in your organization's retirement plan? Many people don't know. In fact, surveys have shown a surprisingly large number of people believe – mistakenly – that they're not paying anything at all. That's about to change.
Starting in August 2012, a new regulation required most organizations to share information about their retirement plans' fees. Going forward, you'll receive fee information in retirement plan statements and in an annual notice. If your employer changes the plan in a way that changes the costs during the year, you'll get an update. While the annual disclosure may be a half dozen to a dozen pages that reads like a price list, read it anyway, keeping an eye on these specifics:
The different types of fees you're paying
There are three main components:
- Investment expenses can make up the lion's share—about two-thirds of your costs in total. These fees include pay for the people who manage the mutual funds or other investments in your employer's plan; they may also go toward covering the plan's administrative expenses. On the new disclosure, you'll see this fee broken out two ways – as a percentage of the money you have invested in that particular investment option, and as a dollar amount you pay for every $1,000 you have in the investment option. This is designed to allow you to compare investment expenses on an apples-to-apples basis.
- Administrative costs are the second category. They include the cost of keeping plan records, providing you with statements, online access to your account information and advice you may have elected.
- Transaction costs are the final category and include the price of borrowing money from the retirement plan and/or withdrawals.
How your fees stack up
Since investment expenses may make up the majority of the plan fees and you can choose from among various investment options, it's important to understand why some have higher fees than others.
Passive funds (like index funds) that adhere to a pre-selected basket of stocks will generally have lower fees than actively managed mutual funds that have installed a skilled individual (or team) to invest on your behalf. Moreover, the higher the risk profile of the managed fund, typically the higher the fees tend to be.
So, stock funds generally have higher expense ratios than bond funds, and international funds generally cost more than domestic ones. None of this means you should abandon managed funds for passive ones or higher risk funds for lower risk ones.
The fees are a piece of the puzzle and should be looked at relative to long-term performance. If a managed fund in your plan is consistently doing well for you in up markets or limiting your losses in down ones, it may be well worth the fees you're paying. If it's consistently underperforming, you may want to think about making a switch.
Make the most of your organization's retirement plan.
Finally, consider whether you're making the most of the retirement plan overall. Fees, while important, are only one part of the picture.
It's similarly important – if not more important – to be sure that you're taking full advantage of the retirement plan your employer has put in place to help ensure you are on track for a more secure retirement. Ask yourself:
- Am I grabbing all the matching contributions I'm eligible for? If not, consider increasing your contribution.
- Am I maximizing my total tax-deductible contribution? If not, consider increasing your contribution.
- Am I in the right investment options for my age and risk tolerance? If not, consider rebalancing in accordance with your goals.
Your organization's retirement plan is likely a bigger part of your retirement picture than ever before. Make it count.
- 401(k) Averages Book, 12th Edition
- Some plan features are not available on all retirement plans.
Investment options are subject to investment risk. Shares or unit values will fluctuate and investments, when redeemed, may be worth more or less than their original cost. It is possible for an investment option to lose value.