One thing that is almost always overlooked in assessing the value and the rewards of a 401(k) plan are the plan administrative fees that are charged to the participants. The largest enemies to your long-term savings through a 401(k) plan are excessive fees by the selected mutual funds. Another set of fees also is circling around your retirement funds, nibbling away at your savings and nearly invisible to the naked eye. These are the fees associated with running the 401(k) plan itself.
Participants in 401(k) plans are currently not adequately informed about the fees associated with the day-to-day operational costs of running increasingly more complex plans. These fees include the costs of mailings and other record-keeping, telephone voice response systems, daily valuation services, educational seminars, retirement planning software -- and all the rest of the clutter.
For instance, some 401(k) plans allow participants to change their asset allocations every day if they so desire -- i.e., switching between different mutual funds however much they want. Other plans only allow changes every three months. Since the provision of any service, regardless of whether it is really something that the participants would want, exacts a price, there are real costs to the provision of every service in a 401(k) plan.
If you have the opportunity to help your office select a plan provider, it is well worth keeping in mind that having too many mutual fund choices is a cost, not a benefit. Similarly, the opportunity to move money into, out of, and between different funds is also a cost, not a benefit. The simpler the plan is, the less it will cost to maintain.
Historically, the administrative costs were generally assumed by the employer. Now, however, more and more expenses are getting shifted to plan participants. While these plan administration expenses are generally not too high, participants should keep an eye on them. Here's a handy checklist of questions, adapted from the Department of Labor, to ask in order to gather information about the fees and expenses paid by your plan:
- What investment options are offered under your company's 401(k) plan?
- Do you have all available documentation about the investment choices under your plan and the fees charged to your plan?
- What types of investment education are available under your plan?
- What arrangement is used to provide services under your plan (i.e., are any or all of the services or investment alternatives provided by a single provider)?
- Do you and other participants use most or all of the optional services offered under your 401(k) plan, such as participant loan programs and insurance coverage?
- If your administrative services are paid separately from investment management fees, are they paid for by the plan, your employer or are they shared?
- Are the investment options tracking an established market index or are there other investment management services being provided?
- Do any of the investment options under your plan include sales charges (such as loads or commissions)?
- Do any of the investment options under your plan include any fees related to specific investments, such as 12b-1 fees, insurance charges or surrender fees, and what do they cover?
- Does your plan offer any special funds or special classes of stock (generally sold to larger group investors)?
This is a pretty good list to consider. But if you're feeling overwhelmed by all this, just click ahead, and we'll sum up all the relevant 401(k) info in about half a page.