December 29, 2008


Many considerations should be an active part of any investment decision - your investment objectives/goals, comfort level with risk, time horizon, management issues (i.e., fund manager, utilizing a financial planner, etc.), asset allocation, and investment fees/expenses to name a few. This week I want to focus specifically on fees and expenses. [While a 401(k) is the most common type of account, you will find that following principles related to managing fees and expenses will apply to other types of investment accounts as well].

While your investment contributions, rate of return, and time are the primary gauges of your account's future value; the fees and expenses paid by your plan can substantially 'shrink' that value. The Department of Labor provides the following example:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent!


ADMINISTRATIVE FEES. The costs of basic administrative services (i.e., accounting, plan record keeping, legal services, etc.) may be borne by different parties: covered by investment fees deducted from investment returns, paid by employer, or charged against the overall assets of the plan. The size of this fee is often correlated with the level of services provided (although note always the case) -- in addition to basic administrative services, some plans may also provide access to customer service reps, educational seminars, software, investment advice, electronic access to plan, online transactions, etc.

INVESTMENT FEES. The heftiest of investment fees are for managing the plan investments. Fees for investment management generally are assessed as a percentage of assets invested. You should always pay close attention to these fees. They will be reflected as an indirect charge against your account (they are deducted directly from your investment returns). Your net total return is your return after these fees have been deducted. Since these fees are not specifically identified on statements, they can go 'unfelt' by investors (out of sight out of mind).

'INDIVIDUAL' SERVICE FEES. Individual service fees are those that are charged separately to those who use particular features. Loan options and brokerage options (ability to purchase stock) are examples of particular features that would be assessed individual service fees.

- Financial sources - Wall Street Journal, Yahoo Finance, Morningstar...
- Plan prospectus (outline of fees associated with investment choices).
- The summary plan description (provided when you join the plan).
- Your account statement.
- Your plan's annual report.

* Keep in mind that law merely requires that fees charged to a 401(k) plan be "reasonable" - there is no specific fee level that is set. If something seems 'unreasonable' to you, contact your plan administrator and let them know.

** By no means am I suggesting that cheaper is necessarily better... rather, fees are one relevant consideration in decision-making. Also, understand that higher cost by no means translates to consistently superior returns.

- A Look at 401(k) Plan Fees
- A Study of 401(k) Plan Fees and Expenses
- Managing Your 401(k): Fee Overview (FINRA)
- Mutual Fund Expense Analyzer