Do 401(k) Funds Charge Fees?
According to the U.S. Department of Labor, if you are 35 and getting a 7 percent return on your 401(k), a fee of 1.5 percent instead of 0.5 percent will decrease your savings by 28 percent by the time you retire. Knowing what fees 401(k) plans charge can help you select plan options with lower fees.
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Fee Types
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You can face fees on your 401(k) plan for a variety of costs, such as plan administration fees, fund expenses and commissions or loads. When a company sets up a 401(k) plan, it incurs expenses for creating the plan documents and then on an ongoing basis for maintaining the plan and compliance. When it passes these costs on to you, these count as administrative fees. Fund expenses refer to the charges specific to the funds in which you invest. Commissions and loads refer to the costs you pay when you buy or sell funds in your 401(k) plan.
Differences in Fees
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Different 401(k) funds, even within the same 401(k) plan, will have different fees depending on the type of investment and the fund's investment strategy. If you select funds that are passively managed, funds that typically mirror indexes and require little research, you will pay lower fees than you will with an actively managed fund. Actively managed funds try to outperform indexes by intensive research and trading, which causes higher costs. However, some of these fees may be subsidized by your employer.
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Overall Performance
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Just because one 401(k) plan investment option has a higher fee does not mean it is necessarily a bad deal. As an investor, look at the performance of each of the funds offered by your plan, or that you have in your portfolio, to see how they are performing. For example, if one fund charges 1 percent fee but returns 5 percent or 6 percent more each year, the fee is likely worth it. However, according to Christine Benz of Morningstar, lower expenses typically correspond to better performance over the long term.
Significance When Leaving Your Employer
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When you leave your employer, you can roll the money in your 401(k) plan into an IRA, a 401(k) plan with a new employer, or just leave it with your old 401(k) plan. Though an IRA offers greater investment options, it could also charge higher fees. If your old 401(k) plan does not have high fees, consider leaving the money with your former company to take advantage of the lower costs. However, if you have the opportunity to take advantage of lower rates elsewhere, a rollover could help increase your savings available at retirement.
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