If you're in a 401(k) plan, you should recently have received a
new disclosure about the fees you are paying within that plan. It
may be dry reading, but it deserves your close attention.
Many people don't even realize they are paying fees in a 401(k)
plan. After all, it's not like you have to write a check or
anything -- the fees are automatically deducted from the value of
your investments. In fact, it might be better if people did have to
write a check for these fees, because being more aware of those
charges would probably lead to closer scrutiny of them.
Shedding new light on 401(k) fees
A new Department of Labor rule requires 401(k) plans to
distribute detailed fee disclosures to participants by August 30,
and will require similar disclosures at least once a year going
forward. Since you may pay hundreds (if not thousands) of dollars
in 401(k) fees over the course of your lifetime, here are four
things you should know about these costs:
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Fee comparisons should be a key part of your option
choices.
Besides offering options with a range of different risk
characteristics, 401(k) plans often offer funds from a variety of
different investment firms. So, for example, if you want to
select a stock fund, you may have several somewhat similar
options available. Besides looking at the investment strategy and
track record of those funds, compare the fees on each. A big fee
differential could tip the balance in making one fund more
attractive than another.
-
Transaction charges are worthy of special
attention.
See if your fund charges you for things like switching from one
option to another. If it does, you'll want to think about
changing your investing habits to minimize those charges. For
example, you might decide to consolidate changes so you make a
big adjustment once a year, rather than a series of smaller
changes. You could also consider an option that takes care of
asset allocation within the fund, so you don't have to transfer
money between funds to
rebalance your portfolio
.
-
Fees are important, but they aren't the only
consideration.
While fees are an important consideration, don't make your
decisions based on these alone. Actively managed funds are likely
to have higher fees than indexed options, which are basically
designed to be on autopilot, following a designated market up and
down. An active manager who has been successful over a full
market cycle may be worth paying a little extra for, as might a
"life cycle" option that automatically adjusts your asset
allocation for you over time.
-
Fees on income investments can negate today's
returns.
In general, higher-risk/higher-reward assets such as stocks will
carry higher fees than cash equivalents or bond funds. But
today's money market rates
are near zero, and bond yields aren't much higher. With interest
rates that thin, you simply can't afford much of a fee on these
options, or you may find yourself with no return on your money at
all.
Investors know only too well that they cannot control the
financial markets. Fees, however, are one aspect of your retirement
investments that you can exercise some control over, and handling
them well can make a big difference in how much money you have in
your plan when it's time to retire.