What fees are associated
with my investment choices in a 401(k) plan?
Apart from fees charged for administration of
the plan itself, there are three basic types of fees that may be charged in
connection with investment alternatives in a 401(k) plan. These fees, which can
be referred to by different terms, include:
- Sales charges(also known as loads or
commissions). These are basically transaction costs for the buying
and selling of shares. They may be computed in different ways, depending
upon the particular investment product.
- Management fees (also known as investment
advisory fees or account maintenance fees). These are ongoing
charges for managing the assets of the investment fund. They are generally
stated as a percentage of the amount of assets invested in the fund.
Sometimes management fees may be used to cover administrative expenses. You
should know that the level of management fees can vary widely, depending on
the investment manager and the nature of the investment product.
Investment products that require significant management, research and
monitoring services generally will have higher fees. (See Question 5.)
- Other fees. This category
covers services, such as recordkeeping, furnishing statements,
toll-free telephone numbers and investment advice, involved in the
day-to-day management of investment products. They may be stated either as a
flat fee or as a percentage of the amount of assets invested in the fund.
In addition, there are some fees that are
unique to specific types of investments. Following are brief descriptions of
some of the more common investments offered under 401(k) plans and explanations
of some of the different terminology or unique fees associated with them.
Some Common Investments and Related Fees
Most investments offered under 401(k) plans
today pool the money of a large number of individual investors. Pooling money
makes it possible for individual participants to diversify investments, to
benefit from economies of scale and to lower their transaction costs. These
funds may invest in stocks, bonds, real estate and other investments. Larger
plans, by virtue of their size, are more likely to pool investments on their own
-- for example, by using a separate account held with a financial institution.
Smaller plans generally invest in commingled pooled investment vehicles offered
by financial institutions, such as banks, insurance companies or mutual funds.
Generally, investment-related fees, usually charged as a percentage of assets
invested, are paid by the participant.
Mutual funds. Mutual funds pool and
invest the money of many people. Each investor owns shares in the mutual fund
that represent a part of the mutual fund’s holdings. The portfolio of
securities held by a mutual fund is managed by a professional investment adviser
following a specific investment policy. In addition to investment management and
administration fees, you may find these fees:
- Some mutual funds assess sales charges (see
above for a discussion of sales charges). These charges may be paid when you
invest in a fund (known as a front-end load) or when you sell shares
(known as a back-end load, deferred sales charge or redemption
fee). A front-end load is deducted up front and, therefore, reduces the
amount of your initial investment. A back-end load is determined by how long
you keep your investment. There are various types of back-end loads,
including some which decrease and eventually disappear over time. A back-end
load is paid when the shares are sold (i.e., if you decide to sell a fund
share when a back-end load is in effect, you will be charged the load).
- Mutual funds also may charge what are known
as Rule 12b-1 fees, which are ongoing fees paid out of fund assets.
Rule 12b-1 fees may be used to pay commissions to brokers and other
salespersons, to pay for advertising and other costs of promoting the fund
to investors and to pay various service providers to a 401(k) plan pursuant
to a bundled services arrangement. They are usually between 0.25 percent and
1.00 percent of assets annually.
- Some mutual funds may be advertised as “no
load” funds. This can mean that there is no front- or back-end load.
However, there may be a small 12b-1 fee.
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Collective investment funds. A
collective investment fund is a trust fund managed by a bank or trust company
that pools investments of 401(k) plans and other similar investors. Each
investor has a proportionate interest in the trust fund assets. For example, if
a collective investment fund holds $10 million in assets and your investment in
the fund is $10,000, you have a 0.1 percent interest in the fund. Like mutual
funds, collective investment funds may have different investment objectives.
There are no front- or back-end fees associated with a collective investment
fund, but there are investment management and administrative fees.
Variable annuities. Insurance companies
frequently offer a range of investment alternatives for 401(k) plans through a
group variable annuity contract between an insurance company and an employer on
behalf of a plan. The variable annuity contract “wraps” around investment
alternatives, often a number of mutual funds. Participants select from among the
investment alternatives offered, and the returns to their individual accounts
vary with their choice of investments. Variable annuities also include one or
more insurance elements, which are not present in other investment alternatives.
Generally, these elements include an annuity feature, interest and expense
guarantees and any death benefit provided during the term of the contract. In
addition to investment management fees and administration fees, you may find
these fees:
- Insurance-related charges are
associated with investment alternatives that include an insurance component.
They include items such as sales expenses, mortality risk charges and the
cost of issuing and administering contracts.
- Surrender and transfer charges are
fees an insurance company may charge when an employer terminates a contract
(in other words, withdraws the plan’s investment) before the term of the
contract expires or if you withdraw an amount from the contract. This fee
may be imposed if these events occur before the expiration of a stated
period and commonly decrease and disappear over time. It is similar to an
early withdrawal penalty on a bank certificate of deposit or to a back-end
load or redemption fee charged by some mutual funds.
Pooled guaranteed investment contract (GIC)
funds. A common fixed income investment option, a pooled GIC fund generally
includes a number of contracts issued by an insurance company or bank paying an
interest rate that blends the fixed interest rates of each of the GICs included
in the pool. There are investment management and administrative fees associated
with the pooled GIC fund.
While the investments described above are
common, 401(k) plans also may offer other investments which are not described
here (such as employer securities). Additional non-profit websites
that include relevant unbiased information about 401k plans
include: www.pension-service-associates.com
and www.mutualfund401k.com.
4. Where can I get
information about the fees and expenses charged to my 401(k) plan account?
If you have questions about the fees and
expenses charged to your 401(k) plan, contact your plan administrator, who
should be able to assist you with the following documents:
- If your plan permits you to direct the
investment of assets in your account, the plan administrator should provide
you with copies of documents describing investment management and other fees
associated with each of the investment alternatives available to you (i.e.,
a prospectus). The plan administrator should also provide a description of
any transaction fees and expenses that will be charged against your account
balance in connection with the investments that you direct.
- Your account statement will show the
total assets in your account, how they are invested and any increases (or
decreases) in your investments during the period covered by the statement.
It may also show administrative expenses charged to your account. Account
statements will be provided once a year upon request, unless your plan
document provides otherwise.
- Your 401(k) plan’s summary plan
description (SPD) will tell you what the plan provides and how it
operates. It may tell you if administrative expenses are paid by your plan,
rather than by your employer, and how those expenses are allocated among
plan participants. A copy of the SPD is furnished to participants when they
join a plan and every 5 years if there are material modifications or every
10 years if there is no modification.
- The plan’s annual report (Form 5500
series) contains information regarding the plan’s assets, liabilities,
income and expenses and shows the aggregate administrative fees and other
expenses paid by the plan. However, it will not show expenses deducted from
investment results or fees and expenses paid by your individual account.
Fees paid by your employer also will not be shown. You may examine the
annual report for free or request a copy from the plan administrator (for
which there may be a charge). A complete explanation of the Form 5500 series
is contained in the publication Protect Your Pension: A Quick
Reference Guide, listed at the back of this booklet. In general, the
summary annual report, which summarizes the annual report
information, is distributed each year.
In addition, you may want to consult the
business section of major daily newspapers, business and financial publications,
rating services, the business librarian at the public library or the Internet
(see the list of helpful Websites listed at the back of this booklet). These
sources will provide information and help you compare the performance and
expenses of your investment options with other investments outside of your
401(k) plan.
If, after doing your own analysis, you have
questions regarding the rates of return or fees of your plan’s investment
options, ask your plan administrator for an explanation.
5. What other factors
might impact the fees and expenses of my 401(k) plan?
- Funds that are “actively managed” (i.e.,
funds with an investment adviser who continually researches, monitors and
actively trades the holdings of the fund to seek a higher return than the
market) generally have higher fees. The higher fees are associated with the
more active management provided and sales charges from the higher level of
trading activity. While actively managed funds seek to provide higher
returns than the market, neither active management nor higher fees
necessarily guarantee higher returns.
- Funds that are “passively managed”
generally have lower management fees. Passively managed funds seek to obtain
the investment results of an established market index, such as the Standard
and Poor’s 500, by duplicating the holdings included in the index. Thus,
passively managed funds require little research or trading activity.
- If the services and investment alternatives
under your plan are offered through a bundled program, then some or all of
the costs of plan services may not be separately charged to the plan or to
your employer. For example, these costs possibly may be subsidized by the
asset-based fees charged on investments. Compare the services received in
light of the total fees paid.
- Plans with more total assets may be able to
lower fees by using special funds or classes of stock in funds, which
generally are sold to larger group investors. “Retail” or “brand
name” funds, which are also marketed to individual and small group
investors, tend to be listed in the newspaper daily and typically charge
higher fees. Let your employer know your preference.
- Optional features, such as participant loan
programs and insurance benefits offered under variable annuity contracts,
involve additional costs. Consider whether they have value to you. If not,
let your employer know. rrp
- Pension plans, such as 401(k) plans, are
group plans. Therefore, your employer may not be able to accommodate each
employee’s preferences for investment alternatives or additional services.
