Recently, I asked a friend of mine if he had any idea what his 401(k) was costing him. He looked at me like I had three heads.
“I don’t pay any fees on my 401(k),” he responded.
For a long time, most workers (an astounding 71%) contributing to
their 401(k) thought the same thing. The truth is, most 401(k)
custodians charge fees…they just were never obligated to tell you about
them. All of that changed when the Department of Labor recently imposed
an August 30th deadline for plan custodians to disclose what
they charge and the expense ratios on your investments and other
investments in your particular plan.
Most retirement plan participants should have received an annual
statement in August outlining investment options, including both past
fund performance and fees. This document may range from seven to twelve
pages depending on the custodian and have been said to be complicated
and confusing.
In addition to this, 401(k) custodians will be sending out Quarterly
statements (could be electronic or paper) which will detail how much an
individual is actually paying on their particular account and
investments.
But be aware – not all plans will be providing a summation of the
total fees and expenses associated with your account. Fund expenses are
allowed to be deducted from the underlying investment, which would add
to the fund’s cost and therefore diminish the return that is reported
(and received).
So what does all of this mean? Well, first off, it provides more
transparency to the industry, which is never a bad thing. But, when
reviewing your fee amounts, remember that not all 401(k) plans are made
the same – this is mainly due to economies of scale. Some 401(k) plans
with a lot of participants will have a lower overall fee ratio, while
smaller plans with less than, say, 100 employees, could have expense
ratios as much as 2.5 times higher than the large participant plan.
As you begin to receive these fee disclosures, take a close look at
numbers and, for what might be the first time, get a sense of what your
401(k) is actually costing you. When all else fails, give us a call at
Lighthouse Financial Advisors and we can assist you in making sense of
it all.
Prepared by Frank T. Corrado
Lighthouse Financial Advisors
www.lfadvisors.com