Saving for retirement is paramount, but you need to be aware of the hidden costs associated with 401(k) plans in order to make the most out of your money.
According to an AARP survey more than 80% of retirement plan contributors have little knowledge of what charges are being applied to their 401(k) plans — charges for things such as administration services, investment services and individual services.
Administration services include record keeping, accounting, customer service access, investment advice and more. Some of these fees may be charged to your employer and/or simply paid by you and others participating in the plan. Normally, the additional services offered the higher the fees.
Investment fees are a bit trickier. They are fees linked to managing investments and are usually assessed as a percentage of assets invested. They are subtly charged against your account by deducting them directly from your returns. You receive your statement and read the net total return, which is the total after these fees have been subtracted. The problem is that these fees are not explicitly revealed on your statement, so you don’t know how much money has been deducted and why.
Individual service fees are related to options that your 401(k) plan offers, such as taking a loan out against your money. Become familiar with these types of options to avoid unwanted charges.
So what do all these fees mean to you? A Government Accountability Office report revealed that a normal retiree could lose up to $100,000 with fees of just 1.5%. And identifying these fees can turn into a laborious task. You’ve received the fund’s prospectus, annual report and summary plan description and sifted through the copious pages, well that’s where you’ll find most of the information needed to understand these fees.
There is hope however. The US Labor Department issued new guidelines that will force companies issuing retirement plans to improve their disclosure methods, therefore making it easier for the ordinary investor to locate fees and charges. But that won’t be in effect until January 1, 2012.
Until then check out a company called Brightscope. They offer a service that provides a rating on your plan, called a Personal 401(k) fee report. It breaks out how much you are paying for your 401(k), in regards to fees for administrative services and more. It also has the Brightscope Rating™. It’s technical — the company uses an algorithm that finds out how efficiently each 401(k) plan will get the average participant to retirement based on a number of elements. It’s all spelled out on their website.
For now, your 401(k) plan is probably costing you money. But you can do something about it and, at the very least, get additional information regarding your plan from your human resource department or by calling the customer service number on your statements. You may be able to alter what services you receive and save yourself some money. It’s also a good idea to become more familiar with the charges and fees, so when the new guidelines come out in 2012 you’ll be familiar with the terms and guidelines.
About the Author
The following post is from Kathryn Katz, a Certified Personal Finance Counselor who works for Consolidated Credit Counseling Services in Ft. Lauderdale, Florida. Their non-profit agency helps families through financial crisis using credit counseling, debt consolidation and financial education.