You have heard the drumbeat: Keep your fees low, and financial success will follow. But do you really know how much you are paying in fees?
The question is far from academic. Investors in defined contribution plans and individual retirement accounts pay billions of dollars in fees every year, and every dollar they pay in fees reduces returns.
Therefore, if one of your New Year's resolutions is to clean up your finances, understanding your 401(k) fees is a great place to start — if you know where to look.
Luckily, federal regulations have made it easier than in the past to figure out what you are paying in 401(k) fees. But too many people fail to look and see what they are shelling out, said Lisa Bleier, managing director and associate general counsel at the Securities Industry and Financial Markets Association.
"Folks do now have the materials" to see what they are spending, she said. "Disappointingly, people are not using them as much as we wish they were."
In addition, even with the improved disclosure, it can take time to sort out exactly what you are paying.
Your fees fall into three main categories: administration, investment and shareholder services. Some, but not all, are baked in. For example, unless your employer absorbs the cost of administering the plan, you will be charged for the service, and it is not negotiable. But shareholder service fees may be different. For example, you can avoid a loan processing fee if you do not borrow against your 401(k).
Investment fees are an area that merit close focus, experts said, in part because they may be the biggest fees you pay. You should receive an annual statement that explains what you pay in investment fees, perhaps expressed in dollar terms for every $1,000 in your plan.
Investment fees can vary widely: An actively managed mutual fund, for example, may come with fees that are several times those on a passive index fund. You may also pay a sales charge when you buy or sell shares.
Your mutual funds may also pay so-called 12b–1 fees, or fees paid to brokers and the like for advertising or bringing in investors, and those may not be explicitly disclosed. Instead, they are reflected in a fund's performance, since they are deducted from the fund's assets before that is calculated. Revenue-sharing agreements that encourage a plan sponsor to include a particular fund may not be specifically disclosed either.
Disclosure of such fees "is a plan-by-plan arrangement," said Dave Gray, vice president of client experience at Schwab Retirement Plan Services. and suggested that plan administrators may be the best source for information on those fees.
Understanding your 401(k) fees can take work, but it is far easier than sorting out the advice you may receive — and the related fees — when you are thinking of moving out of a 401(k).
Currently, advisors working with clients at that point can recommend investment choices that may be suitable but not truly in an investor's best interest, and that is costing investors billions of dollars annually in fees, according to an analysis by the Council of Economic Advisors.
The council found that fees related to conflicted advice cost investors a full percentage point in annual returns — a significant sum when you consider that investors typically earn pretax returns between 4 percent and 6 percent over the long haul.
A new rule that may soon be issued by the Department of Labor could require advisors to provide only advice that is in investors' best interest, a standard known as the fiduciary rule.
"The Department of Labor already had significant rules on 401(k)s, as well as on defined benefit plans," said Jim Allen, head of capital markets policy, Americas, for the CFA Institute. "When people were being advised to take money out of 401(k)s and roll it over into another institution that may or may not be in the best interests of the client, that's what the Labor Department is trying to affect."
Foes and proponents of the new rule are watching for signs of when it may be released. Allen, for one, said it may come sooner rather than later, since the Obama administration would likely want it implemented before the new Congress.
Understanding investments and financial statements from 401(k)s and the like is not a simple matter, he said. "It's a unique language. I can't read computer language, and there are people that have a difficult time understanding financial language as well."
But taking the time to decode all those terms and percentages can pay off, experts said, adding that ultimately, investing is about returns, not just fees.
"Costs matter, but it's not just about cost. It's also about value for the cost," Gray said.
Still, if you can keep your investing fees in check, your nest egg will be that much bigger and you will be able to tap it for a lot longer.