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More and more employees are investing in their futures
through 401(k) plans. Employees who participate in 401(k) plans assume
responsibility for their retirement income by contributing part of their
salary and, in many instances, by directing their own investments.
If you are among those who direct your investments, you
will need to consider the investment objectives, the risk and return
characteristics, and the performance over time of each investment option
offered by your plan in order to make sound investment decisions. Fees and expenses are one of the factors that will affect your investment returns
and will impact your retirement income.
The information contained in this booklet answers some
common questions about the fees and expenses that may be paid by your
401(k) plan. It highlights the most common fees and encourages you, as a
401(k) plan participant, to:
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Make informed investment decisions
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Consider fees as one of several factors in your
decision making
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Compare all services received with the total cost
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Realize that cheaper is not necessarily better
Keep in mind, however, that this booklet is a simplified explanation of
401(k) fees. It is not a legal interpretation of the nation’s major
pension protection law, the Employee Retirement Income Security Act (ERISA),
or other laws, nor is this information intended to be investment advice.
In a 401(k) plan, your account balance will determine the
amount of retirement income you will receive from the plan. While
contributions to your account and the earnings on your investments will
increase your retirement income, fees and expenses paid by your plan may
substantially reduce the growth in your account. The following example
demonstrates how fees and expenses can impact your account.
Assume that you are an employee with 35 years until
retirement and a current 401(k) account balance of $25,000. If returns on
investments in your account over the next 35 years average 7 percent and
fees and expenses reduce your average returns by 0.5 percent, your account
balance will grow to $227,000 at retirement, even if there are no further
contributions to your account. If fees and expenses are 1.5 percent,
however, your account balance will grow to only $163,000. The 1 percent
difference in fees and expenses would reduce your account balance at
retirement by 28 percent.
In recent years, there has been a dramatic increase in
the number of investment options typically offered under 401(k) plans as
well as the level and types of services provided to participants. These
changes give today’s employees who direct their 401(k) investments greater
opportunity than ever before to affect their retirement savings. As a
participant you may welcome the variety of investment alternatives and the
additional services, but you may not be aware of their cost. As shown above,
the cumulative effect of the fees and expenses on your retirement savings
can be substantial.
You should be aware that your employer also has a
specific obligation to consider the fees and expenses paid by your plan.
ERISA requires employers to follow certain rules in managing 401(k) plans.
Employers are held to a high standard of care and diligence and must
discharge their duties solely in the interest of the plan participants and
their beneficiaries. Among other things, this means that employers must:
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Establish a prudent process for selecting investment
alternatives and service providers
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Ensure that fees paid to service providers and other
expenses of the plan are reasonable in light of the level and quality of
services provided
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Select investment alternatives that are prudent and
adequately diversified
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Monitor investment alternatives and service providers
once selected to see that they continue to be appropriate choices
If you want to know how fees affect your retirement
savings, you will need to know about the different types of fees and
expenses and the different ways in which they are charged.
401(k) plan fees and expenses generally fall into three
categories:
Plan Administration Fees -
The day-to-day operation of a 401(k) 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 401(k) plan also may offer a host of additional services,
such as telephone voice response systems, access to a customer service
representative, educational seminars, retirement planning software,
investment advice, electronic access to plan information, daily valuation
and on-line transactions.
In some instances, the costs of administrative services
will be covered by investment fees that are deducted directly from
investment returns. Otherwise, if administrative costs are separately
charged, they will be borne either by your employer or charged directly
against the assets of the plan. When paid directly by the plan,
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. Either way, generally the more
services provided, the higher the fees.
Investment Fees -
By far the largest component of 401(k) 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.
Individual Service Fees -
In addition to overall administrative expenses, there may be individual
service fees associated with optional features offered under a 401(k) 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.
401(k) plan investments and services may be provided
through a variety of arrangements:
Employers may directly provide, or separately negotiate
for, some or all of the various services and investment alternatives offered
under their 401(k) plans (sometimes referred to as an unbundled
arrangement). The expenses of each provider (i.e., investment manager,
trustee, recordkeeper, communications firm) are charged separately.
In many plans, some or all of the various services and
investment alternatives may be offered by one provider for a fee paid to
that provider (sometimes referred to as a bundled arrangement). The provider
will then pay out of that fee any other service providers that it may have
contracted to provide the services.
Some plans may use an arrangement that combines a single
provider for certain services, such as administrative services, with a
number of providers for investment options.
Fees need to be evaluated, keeping in mind the cost of all
covered services.
Apart from fees charged for administration of the plan
itself, there are three basic types of fees that may be charged in
connection with investment alternatives in a 401(k) plan. These fees, which
can be referred to by different terms, include:
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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.
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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.
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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.
In addition, there are some fees that are unique to
specific types of investments. Following are brief descriptions of some of
the more common investments offered under 401(k) plans and explanations of
some of the different terminology or unique fees associated with them.
Most investments offered under 401(k) plans today pool
the money of a large number of individual investors. Pooling money makes it
possible for individual participants to diversify investments, to benefit
from economies of scale and to lower their transaction costs. These funds
may invest in stocks, bonds, real estate and other investments. Larger
plans, by virtue of their size, are more likely to pool investments on their
own -- for example, by using a separate account held with a financial
institution. Smaller plans generally invest in commingled pooled investment
vehicles offered by financial institutions, such as banks, insurance
companies or mutual funds. Generally, investment-related fees, usually
charged as a percentage of assets invested, are paid by the participant.
Mutual Funds -
Mutual funds pool and invest the money of many people. Each investor
owns shares in the mutual fund that represent a part of the mutual fund’s
holdings. The portfolio of securities held by a mutual fund is managed by a
professional investment adviser following a specific investment policy. In
addition to investment management and administration fees, you may find
these fees:
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Some mutual funds assess sales charges (see above for
a discussion of sales charges). These charges may be paid when you
invest in a fund (known as a front-end load) or when you sell shares
(known as a back-end load, deferred sales charge or redemption fee). A
front-end load is deducted up front and, therefore, reduces the amount
of your initial investment. A back-end load is determined by how long
you keep your investment. There are various types of back-end loads,
including some which decrease and eventually disappear over time. A
back-end load is paid when the shares are sold (i.e., if you decide to
sell a fund share when a back-end load is in effect, you will be charged
the load).
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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 salespersons,
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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Some mutual funds may be advertised as “no load”
funds. This can mean that there is no front- or back-end load. However,
there may be a small 12b-1 fee.
Collective Investment Funds -
A collective investment fund is a trust fund managed by a bank or trust
company that pools investments of 401(k) plans and other similar investors.
Each investor has a proportionate interest in the trust fund assets. For
example, if a collective investment fund holds $10 million in assets and
your investment in the fund is $10,000, you have a 0.1 percent interest in
the fund. Like mutual funds, collective investment funds may have different
investment objectives. There are no front- or back-end fees associated with
a collective investment fund, but there are investment management and
administrative fees.
Variable Annuities -
Insurance companies frequently offer a range of investment alternatives
for 401(k) plans through a group variable annuity contract between an
insurance company and an employer on behalf of a plan. The variable annuity
contract “wraps” around investment alternatives, often a number of
mutual funds. Participants select from among the investment alternatives
offered, and the returns to their individual accounts vary with their choice
of investments. Variable annuities also include one or more insurance
elements, which are not present in other investment alternatives. Generally,
these elements include an annuity feature, interest and expense guarantees
and any death benefit provided during the term of the contract. In addition
to investment management fees and administration fees, you may find these
fees:
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Insurance-related charges are associated with
investment alternatives that include an insurance component. They
include items such as sales expenses, mortality risk charges and the
cost of issuing and administering contracts.
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Surrender and transfer charges are fees an insurance
company may charge when an employer terminates a contract (in other
words, withdraws the plan’s investment) before the term of the
contract expires or if you withdraw an amount from the contract. This
fee may be imposed if these events occur before the expiration of a
stated period and commonly decrease and disappear over time. It is
similar to an early withdrawal penalty on a bank certificate of deposit
or to a back-end load or redemption fee charged by some mutual funds.
Pooled Guaranteed Investment Contract (GIC) Funds - A common fixed income investment option, a pooled GIC fund generally
includes a number of contracts issued by an insurance company or bank paying
an interest rate that blends the fixed interest rates of each of the GICs
included in the pool. There are investment management and administrative
fees associated with the pooled GIC fund.
While the investments described above are common, 401(k)
plans also may offer other investments which are not described here (such as
employer securities).
If you have questions about the fees and expenses charged
to your 401(k) plan, contact your plan administrator, who should be able to
assist you with the following documents:
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If your plan permits you to direct the investment of
assets in your account, the plan administrator should provide you with
copies of documents describing investment management and other fees
associated with each of the investment alternatives available to you
(i.e., a prospectus). The plan administrator should also provide a
description of any transaction fees and expenses that will be charged
against your account balance in connection with the investments you
direct.
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Your account statement will show the total assets in
your account, how they are invested and any increases (or decreases) in
your investments during the period covered by the statement. It may also
show administrative expenses charged to your account. Account statements
will be provided once a year upon request, unless your plan document
provides otherwise.
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Your 401(k) plan’s summary plan description (SPD)
will tell you what the plan provides and how it operates. It may tell
you if administrative expenses are paid by your plan, rather than by
your employer, and how those expenses are allocated among plan
participants. A copy of the SPD is furnished to participants when they
join a plan and every 5 years if there are material modifications or
every 10 years if there is no modification.
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The plan’s annual report (Form 5500 series)
contains information regarding the plan’s assets, liabilities, income
and expenses and shows the aggregate administrative fees and other
expenses paid by the plan. However, it will not show expenses deducted
from investment results or fees and expenses paid by your individual
account. Fees paid by your employer also will not be shown. You may
examine the annual report for free or request a copy from the plan
administrator (for which there may be a charge). In
general, the summary annual report, which summarizes the annual report
information, is distributed each year.
In addition, you may want to consult the business section
of major daily newspapers, business and financial publications, rating
services, the business librarian at the public library or the Internet (see
the list of helpful Websites listed at the back of this booklet). These
sources will provide information and help you compare the performance and
expenses of your investment options with other investments outside of your
401(k) plan.
If, after doing your own analysis, you have questions
regarding the rates of return or fees of your plan’s investment options,
ask your plan administrator for an explanation.
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Funds that are “actively managed” (i.e., funds with
an investment adviser who continually researches, monitors and actively
trades the holdings of the fund to seek a higher return than the market)
generally have higher fees. The higher fees are associated with the more
active management provided and sales charges from the higher level of
trading activity. While actively managed funds seek to provide higher
returns than the market, neither active management nor higher fees
necessarily guarantee higher returns.
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Funds that are “passively managed” generally have
lower management 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 little research or trading
activity.
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If the services and investment alternatives under your
plan are offered through a bundled program, then some or all of the
costs of plan services may not be separately charged to the plan or to
your employer. For example, these costs possibly may be subsidized by
the asset-based fees charged on investments. Compare the services
received in light of the total fees paid.
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Plans with more total assets may be able to lower fees
by using special funds or classes of stock in funds, which generally are
sold to larger group investors. “Retail” or “brand name” funds,
which are also marketed to individual and small group investors, tend to
be listed in the newspaper daily and typically charge higher fees. Let
your employer know your preference.
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Optional features, such as participant loan programs and
insurance benefits offered under variable annuity contracts, involve
additional costs. Consider whether they have value to you. If not, let
your employer know.
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Pension plans, such as 401(k) plans, are group plans.
Therefore, your employer may not be able to accommodate each
employee’s preferences for investment alternatives or additional
services.
There are an array of investment options and services
offered under today’s 401(k) plans. While there is no easy way to
calculate the fees and expenses paid by your 401(k) plan due to the number
of variables involved, you can begin by asking yourself questions and, if
you cannot find the answers, by asking your plan administrator. Answers to
the following 10 questions will help in gathering information about the fees
and expenses paid by your plan.
401(k) Fees Checklist
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What investment options are offered under your
company’s 401(k) plan?
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Do you have all available documentation about the
investment choices under your plan and the fees charged to your plan?
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What types of investment education are available
under your plan?
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What arrangement is used to provide services under
your plan (i.e., are any or all of the services or investment
alternatives provided by a single provider)?
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Do you and other participants use most or all of the
optional services offered under your 401(k) plan, such as participant
loan programs and insurance coverages?
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If administrative services are paid separately from
investment management fees, are they paid for by the plan, your employer
or are they shared?
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Are the investment options tracking an established
market index or is there a higher level of investment management
services being provided?
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Do any of the investment options under your plan
include sales charges (such as loads or commissions)?
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Do any of the investment options under your plan
include any fees related to specific investments, such as 12b-1 fees,
insurance charges or surrender fees, and what do they cover?
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Does your plan offer any special funds or special
classes of stock (generally sold to larger group investors)?
This booklet is only the beginning of your educational
process. You should ask questions and educate yourself about investments.
Monitoring your current investment selections and reviewing the investment
alternatives offered under your plan are part of a process that you, as an
informed participant, will need to undertake continually.
Keep in mind that the law requires the fees charged to a
401(k) plan be “reasonable” rather than setting a specific level of fees
that are permissible. Therefore, the reasonableness of fees must be
determined in each case.
For additional information regarding the level of fees
typically charged to 401(k) plans and 401(k) plan fees and expenses
generally, see the Employee Benefits Security Administration’s Study
of 401(k) Plan Fees and Expenses.
When you consider the fees in your 401(k) plan and their
impact on your retirement income, remember that all services have costs. If
your employer has selected a bundled program of services and investments,
compare all services received with the total cost.
Remember, too, that higher investment management fees do
not necessarily mean better performance. Nor is cheaper necessarily better.
Compare the net returns relative to the risks among available investment
options.
And, finally, don’t consider fees in a vacuum. They are
only one part of the bigger picture including investment risk and returns
and the extent and quality of services provided.
Listed below are some organizations and their Web sites, phone numbers and
publications that can help in your research.
Employee Benefits Security Administration:
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What You Should Know About
Your Retirement Plan
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Study of 401(k) Plan Fees and Expenses (available only on the Internet)
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Toll-Free Publication Hotline: 1.866.444.EBSA (3272)
Securities
and Exchange Commission:
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Get the Facts on Savings and Investing
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Invest Wisely - An Introduction to Mutual Funds
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Ask Questions - Questions You Should Ask About Your Investments...and What To Do if You Run into Problems
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Toll-free phone information service: 1.800.732.0330
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