What is your retirement plan costing you?

April 12th, 2013 madmin

This material was prepared for Trent Yeazel, LPL Financial Advisor, use.

While many people will set their 401(k) monthly deferral amount and then forget about it, it’s hugely beneficial to pay attention to your type of plan, mix of investments and level of risk – especially as an empty nester.

Fees, in particular, are a key component to that equation. From advisory fees to administrative costs, the fees siphoned from your retirement account can quickly add up to big bucks.

How can I determine how much I pay in fees?

To help make fee structures more transparent, The Department of Labor last year passed legislation that requires providers to detail all the costs associated with 401(k) plans. The idea was to improve transparency by preventing hidden fees, help employers shop for the best options for their employees and make it easier for consumers to understand what they are paying.

As part of the new legislation, your fees should now be listed clearly on your statement. And instead of just listing the amount, fees are broken down to show you exactly who and what you are paying.

Keep in mind, however, that every plan provider is different in how and when they charge the fees. Some may assess them every month, while others may only do it every quarter or year.

What types of fees are there?

  • Plan Administration and Compliance Fees. The day-to-day operation of a plan involves expenses for basic administrative services – such as plan recordkeeping, accounting, legal and trustee services – that are necessary for administering the plan as a whole. Administrative fees are either allocated among individual accounts in proportion to each account balance (i.e. participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account. Generally the more services provided, the higher the fees.
  • Investment Fees. These are usually the largest component of plan fees and expenses. Fees for investment management and other related services generally are assessed as a percentage of assets invested. They are typically paid in the form of an indirect charge against the participant’s account or the plan because they are deducted directly from investment returns. Net total return is the return after these fees have been deducted.
  • Individual Service Fees. In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under an individual account plan. Individual service fees may be charged separately to the accounts of those who choose to take advantage of a particular plan feature. For example, fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.

Remember – there are a variety of plan designs and fees that may affect your retirement account. The list above is an overview of the more common ones. Review your quarterly statement to determine exactly what you pay.

What is a “normal” range for fees?

While fees can vary enormously among plans, the standard range is anywhere between 1-2.5 percent.

Funds that are “actively managed” by an investment advisor generally have higher fees than funds that are “passively managed.” The higher fees are associated with the more active management provided and the higher level of trading activity.

Funds that are “passively managed” generally have lower 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 less research and trading activity.

If your fees gravitate towards the higher end of that scale, make sure that you are receiving a fair amount of service and expert advice for those fees.

Despite the new disclosure legislation that went into effect last summer, retirement fees can be a confusing topic. If you need more information, don’t hesitate to contact the MidWestOne team of financial advisors.

Trent Yeazel is a LPL Financial Advisor at MidWestOne Investment Services. He specializes in investments and retirement planning.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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