Part I: Top 3 401(k) Hidden Fee Misconceptions
Do you know the total costs you are paying for your retirement plan? There can be as many as 17 hidden 401k fees cutting into a retirement portfolio and these fees can range anywhere from 2% to 12%. Your plan assets can be reduced by 50% or more! Nearly 80% of plan trustees aren’t aware of all the fees and expenses their plan entails.
Today starts our 4 part series on how various hidden fees can cripple your retirement savings. Even as the Department of Labor sets new rules for fee disclosure and transparency, plan sponsors, trustees and business owners continue to be sued for not safeguarding their employees’ future.
- Don’t be fooled into thinking the advisor’s fee also known as the asset management fee is the only costs your retirement plan will incur. When your advisor offers you a portfolio of funds not only will you pay the advisor, you must also pay for the funds your advisor recommends, and this is where you’ll find fixed expenses and variable expenses. Every mutual fund and ETF charges the annual expense ratio. This pays for the toll free customer service number, the fund’s recurring operating costs, the fund manager’s salary. A study by Morningstar found that the average expense ratio is about 1.5%, although many are more 2%, with the highest in the industry a whopping 15%! The annual expense ratio is actually debited on a daily basis. As an investor or plan trustee, you’ll rarely notice it, since you’d have to thumb through the fund’s prospectus, which is usually very lengthy reading, to find it. If you thought the annual expense ratio covered all of the fund’s expenses, you’re wrong. It covers mainly recurrent fixed costs like marketing or salaries, even overhead. But what about variable costs?
- Do you know what the fund’s trading, or brokerage commission costs are? Whenever the fund manager buys or sells a security, he pays for it which means you pay for it. Even though they pay a lower commission rate, considering that funds trade millions of shares, representing billions of dollars, their trading costs are huge! Most funds can spend upwards of tens of millions of dollars in trading costs per year, and these costs are not included in the Annual expense ratio or even the prospectus. You’d have to go to the SAI or the Statement of Additional Information for the fund. Try getting that from your service provider, advisor, plan sponsor, etc depending on whether you are a plan sponsor, participant or an individual investor!
- The Statement of Additional Information, unlike the prospectus, is not something the advisors have to provide to you. Because of this, many plan sponsors, plan participants or individual investors never see one. In all honesty, most advisors themselves have never even heard of the SAI. Yet the fees it discloses can equal and in some cases exceed the Annual Expense Ratio. Remember even a small difference in fees can make a big difference in the overall size of a retirees final 401k account balance. Are you aware of all these hidden costs you may be incurring? SAI or Statement of Additional information expenses can be really difficult to determine, but the average SAI charge is roughly 1.40% a year. This would be in addition to the 1.5% charged by the Average Expense Ratio I talked about a few days ago. Now you’re paying about 2.9%, almost 3%. In other words, the total charge of the average mutual fund is roughly 3.00% per year. This will be in addition to your advisor’s fee.
To review:
- Asset management fees
- Brokerage commission costs and
- SAI charges
can have lots of layers so the key is to make sure you get to the bottom line.
For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.
About Charles Massimo
Recognized as industry expert and guest speaker at national industry conferences, Charles Massimo is a published author and media subject expert on topics ranging from wealth/asset management to investment and financial planning for high net worth families.