November 15, 2013   Retirement Planning

Hidden Fees in “Free” 401(k) Plans

Most American workers are somewhat familiar with the concept of a defined-contribution pension account, commonly known as a 401(k) plan. A worker with a 401(k) plan makes retirement savings contributions out of his or her paycheck, which are often matched by his or her employer. Simply put, a 401(k) plan is a savings vehicle to help care for you in your retirement.
What many Americans do not realize is that there are fees associated with 401(k) plans. Although fees must now be disclosed to all plan participants, a recent AARP survey revealed that 80% of 401(k) plan participants were unaware of the amount they were paying out in fees.
401(k) plan fees are collected, monthly, by the mutual fund that provides and manages your plan. These fees often represent four categories, (1) administrative, (2) investment, (3) asset, (4) audit. The expense ratios for these categories will typically range from 0.5% to 1.55%. In 2011, the average expense ratio across all funds was .78%.
The variance in expense ratios often reflects how the fund is managed. The average fee for an actively managed fund is .93%. As the name suggests, an actively managed fund is managed by managers who select various investment vehicles for the fund. Conversely, the average fee on an index fund, which is passively managed, is .14%.
Importantly, do not allow these fees to dissuade you from contributing to your 401(k) account. These fees are a small price to pay for the matching contribution from your employer, which will more than cover the cost of the fees.
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