Kelly from South Carolina asks, "I'm curious about Plan fees and account expenses? Do they affect my account?"
{Sub:BusinessName} answers, "Fees and expenses are one of the factors that will affect your investment returns and will impact your retirement income. We've provided you with a simplified explanation of 401(k) fees. It is not a legal interpretation of the nation's major pension protection law, nor is this information intended to be investment advice.
Fees and expenses paid by your plan may substantially reduce the growth in your account. (Be aware that your employer also has specific legal obligations to consider the fees and expenses paid by your plan.) Plan fees and expenses generally fall into three categories:
Plan Administration Fees. The day-to-day operation of a retirement plan involves 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. Today a retirement plan may also offer a host of additional services, such as phone systems, access to customer service representatives, educational seminars, retirement planning software, investment advice, online access to plan information, daily valuation and online transactions.
In a bundled approach, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. In an unbundled approach, administrative costs are charged separately.
Individual Service Fees. In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a retirement plan. Individual service fees are charged separately to the accounts of individuals who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.
Investment Fees. By far the largest component of plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted. For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent.
There are three basic types of fees that may be charged in connection with investment options in a retirement plan. These fees, which can be referred to by different names, 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.
Other fees. This category covers services, such as record keeping, 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.
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 salespeople, 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."
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