According to a recent study by TD Ameritrade, roughly 75% of participants don’t know/believe they’re paying any fees at all for their 401(k) — 37% believe they don’t pay any fees, 22% don’t know if their plan has fees, and 14% don’t know how to determine their fees.
A 2011 AARP study found that 71% of people believed they paid no fees for their 401(k)s at all.2 That goes to show just how unclear the fees and requirements surrounding 401(k) accounts can be.
A fee is something that covers the costs of administering a 401(k), IRA, or other investment and wealth management vehicle. For example, an advisory fee is a management fee paid to the financial advisor overseeing your account. A 401(k) fee is an administrative fee that covers the maintenance of the plan — costs of the online systems used to manage the plans, cover reporting about the account, and even the costs of printing and mailing updates. And a third-party administrator fee will cover the costs of simply being able to offer the plan — this covers any registration fees and legal filings the entity has to provide in order to offer a particular plan.
Here’s a basic rundown of the most common fees.
- Brokerage account fees: These are annual fees that maintain a brokerage account, subscriptions for premium research from financial market experts, and subscription fees to access the trading platforms.
- 401(k) fees: Administrative fees to maintain the plan, usually passed on from the employer to the plan participants.
- Management or advisory fees: Based on the percentage of the investor’s assets being managed by a financial advisor.
- Third-party administrator fee: Consultant who makes plan design recommendations. Can also provide record keeping services.
- Trade commissions: The fees a broker takes when you buy or sell certain investments such as equities, ETF’s, or mutual funds.
- Sales loads: A sales charge or commission on some mutual funds, paid to the broker or salesperson who sold the fund.
- Mutual fund expense ratios: An annual fee charged as a percentage of your investment in the fund, whether it’s a mutual fund, index fund, etc.
These fees can add up quickly, and take a big bite out of your investments. A 2017 story on CNBC gave us this example: If you have $25,000 in your 401(k) and earn an average annual return of 7% over 35 years, your balance would be $227,000. And that’s only with an annual plan expense ratio of .5%. If your plan expense ratio was 1.5%, your balance would be $163,000. That’s a 28% loss of your retirement just because of a one percent difference between the two fees.
Or, says USA Today, imagine you save $10,000 per year for 30 years, and average 7% returns. If you have 0.5% in annual expenses, you’ll finish with $920,000 when you retire. But with 1% in fees, the total drops to $840,000, and 2% annual fees nets you $697,608. That’s over $220,000 less than what you could have had.
Do You Know What Your Fees Are?
In 2012, the Department of Labor enacted the “Reasonable Contract or Arrangement Under Section 408(b)(2) — Fee Disclosure.” This requires that all retirement plan providers must disclose to the costs associated with managing the plan to its sponsors. However, this means the fees have to be clearly defined to the employers, but may become unclear in the communications to the employees.
Invst is considered the investment manager or co-fiduciary of your account. A fiduciary is the entity that is responsible for the holdings and how they are managed. This would appear on the account statement as an advisor fee.
An advisor fee is generally calculated as either a flat rate or a percentage of the asset. Since Invst is considered a fiduciary on the accounts, we’re inclined to keep our rates lower as these fees and expenses will cut into the performance of the accounts we’re responsible for. That is, the more we take, the worse the investments perform, so we keep our fees low in order to keep from adversely affecting the investments performance.
Other asset management firms can sometimes have hidden fees. For example, the 12B-1 fee typically shows up in a mutual fund account as a percentage of the asset. But it’s considered a hidden fee because while it could be 2% of the asset, it’s not clear where that 2% goes. Is it 1% admin and 1% commission to the advisor? Is it .5% admin and 1.5% commission? You’ll never know just by looking at it, which means you’ll have to ask the manager what the breakdown is.
Transparency is key with Invst, as it should be with all financial advisors. Serving our customers fairly and providing value without taking more than we’ve earned is our most important principle. We’re almost always able to cut your costs in half against competitor rates and fees.
As an employee, it’s easy to assume that any plan offered has been thoroughly vetted by an employer as they are typically considered the fiduciary on the account. Vetting doesn’t always happen, however. Unless you work at at a financial services company, management may not be clear on the specifics of your chosen plan. They just want to make a quick choice and get back to their regular work.
Wouldn’t it be great if all financial advisors offered transparency, teamwork, and even education for the employees? Invst advisors are available to clarify anything that may be confusing plan participants, as well as offering further education and training for those who want a more thorough and in-depth knowledge of their accounts.