You will require knowing about the different types of fees
and expenses and the different ways in which they are charged if you want to
know how fees affect your retirement savings.
In general, 401(k) plan fees and expenses fall into three
categories:
Plan Administration Fees
Expenses for basic administrative services -- such as plan
record keeping, accounting, legal and trustee services -- that are necessary
for administering the plan as a whole includes the day-to-day operation of a
401(k) plan.
Today, a host of additional services, such as telephone
voice response systems, access to a customer service representative,
educational seminars, retirement planning software, investment advice,
electronic access to plan information, daily valuation, and on-line
transactions may also be offered by a 401(k) plan.
Investment fees that are deducted directly from investment
returns will cover the costs of administrative services in some cases.
Otherwise, they will be either borne by your employer or charged directly
against the assets of the plan if administrative costs are separately charged.
Administrative fees are either owed among individual accounts
along with lines of each account balance (i.e., participants with larger
account balances pay more of the allocated expenses) or passed through as a
flat fee against each participant's account when paid directly by the plan.
Either way, generally the more services provided, the higher the fees.
Investment Fees
Fees and expenses are by far the largest components of
401(k) plan with managing plan investments. Fees for investment management and
other investment-related services usually are assessed as a percentage of
assets invested. You should concentration on these fees.
Since they are deducted directly from your investment
returns, you pay for them in the form of an indirect charge against your
account. After deduction of these fees, your net total return is your return.
Hence,
these fees, which are not exclusively identified on statements of investments,
may not be immediately apparent.
Individual Service Fees
There may be individual service fees associated with
optional features in addition to overall administrative expenses offered under
a 401(k) plan. Individual service fees are charged separately to the accounts
of individuals who choose to make the most of a particular plan feature.
For
example, for taking a loan from the plan or for executing participant
investment directions, individual service fees may be charged to a participant.
By means of a variety of arrangements, 401(k) plan
investments and services may be provided:
Some or all of the various services and investment
alternatives may be offered in many plans, by one provider for a fee paid to
that provider (sometimes referred to as a bundled arrangement).
The provider
will then pay out of that fee any other service providers that it may have
contracted to provide the services.
Employers may directly provide, or separately negotiate for,
some or all of the various services and investment alternatives offered under
their 401(k) plans (sometimes referred to as an unbundled arrangement).
For the
expenses of each provider (i.e., investment manager, trustee, recordkeeper,
communications firm), there may be separated charges.
For
certain services, such as administrative services, with a number of providers
for investment options, some plans may use an understanding that combines a single
provider.
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