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3 Pieces of 401(k) Investment Advice

Nicole Seghetti
June 7, 2014

Your 401(k) is the best option for ensuring you retire when and how you want. But it's not likely your employer offers much 401(k) investment advice, making it important for you to gain as much knowledge as you can. Here are three ways you can best manage your 401(k).

1. Read your materials
This sounds basic, and it is, but few people actually spend time doing it. According to a 2012 LIMRA study, two-thirds of Americans with retirement plans admitted spending less than five minutes reviewing their retirement-plan disclosures. Worse yet, 20% said they "rarely or never read disclosure paperwork at all." 

By not reading your materials, you could be missing out on valuable pieces of information regarding your plan. Ask your HR department for a copy of your summary plan description, or SPD. That's a plain-English document that provides you with the ins and outs of your plan. Learn about your possible company match and profit sharing, 401(k) loan provisions, and much more.

2. Pay attention to fees
The same LIMRA study mentioned above showed that 90% of 401(k) participants either didn't think they paid any fees or didn't know the fees they paid for their plans. But you, as the 401(k) plan participant, pay for most plan fees -- not your employer. While fees have decreased substantially in the past decade, everyone pays a fee to have a 401(k). In a 2011 Fee Study conducted by Deloitte for the Investment Company Institute, the median "all-in" fee stood at 0.78% per year. That means a typical 401(k) owner would pay about $780 annually for every $100,000 in his or her account.

Small improvements in plan fees can pay off big-time. A Government Accountability Office study compared the difference between paying 1.5% in fees versus 0.5%. It started with someone with a 401(k) account balance of $20,000 and assumed the investment grew by 7% each year. A person paying 0.5% in fees would have about $70,500 in 20 years, but a person paying 1.5% in fees would have a retirement balance of only $58,400 in 20 years, representing a cost of more than $12,000.

Plan fees fall into three categories: asset-based (mutual fund expense ratios), administrative (record keeping and custodial service fees), and individual participant fees (special-request activity like expedited paperwork and overnighted checks). Historically, these figures weren't spelled out in hard dollars and cents for you, but a 2