You know that putting away money for retirement is important, but do you know what it really costs to manage it on your behalf? Retirement plan fees vary widely, and it’s not always easy to get your hands on hard numbers, which can be frustrating.
“The most important thing is to not let your frustration with the lack of transparency when it comes to fees keep you from taking action,” says Desmond Henry, founder of Afflora Financial Life Planning. “At the end of day, employer-sponsored retirement plans are a great benefit that oftentimes includes employer match contributions to help you save for your retirement.”
Here’s what you need to know.
You May Find That Fees Come in Many Forms
Just looking for “fees” on the information you get from the plan sponsor won’t tell you what you’re looking for, because they’re not always called “fees.” Fees may be paid by the plan sponsor or they may be passed along to participants, and they may have a variety of names, says Jeremy Torgerson, CEO of nVest Advisors, a financial planning firm. Some of the expenses you might encounter include:
- Front-end or contingent deferred sales charges, sometimes called surrender charges. This is a fee you have to pay if you withdraw or roll over funds before a certain time.
- Total plan administrative costs.
- A 12b-1 fee, also called a marketing fee. It’s considered an operational expense.
- Additional administrative and mortality and expense fees for annuity products.
Because these fees vary widely, your employer may shop around periodically to make sure costs are competitive. Keep an eye on your retirement plan and when things change, read the prospectus to determine what constitutes a fee under the new offerings.
You May Have to Dig for Details
Because there are so many different kinds of fees that depend on the kind of account you have, you may have to make a few calls to get clear answers. All funds must follow rules set by the federal government about disclosing fees, says Paul Ruedi, CEO of Ruedi Wealth Management financial services firm. So the information is there, you just might have to ask the plan administrator of HR.
Torgerson recommends asking for a summary prospectus for each fund. “Product prospectus brochures provide you all of this information, but they are notoriously difficult to read,” he says. A summary prospectus should give a quick overview that can be easier to scan and find information.
If you still don’t have the information you need, Torgerson recommends asking for an independent review by a financial adviser or certified financial planner. “We all have analytical software that will give us a good look under the hood of your portfolio,” he says.
You Can Minimize Fees’ Impact
Even if a fund says it’s “free,” it probably isn’t — just as with most products and services.
“Some providers promote their products and services with the claim that they charge no fees; however, common sense would indicate otherwise,” Henry says. “These ‘free’ services are typically compensated through fees that are embedded in their products.”
However, you can control the effect fees have on your investments by sticking to index or passively managed mutual funds. “The fee that plan participants have the most control over is the expense ratio, which is associated with the investment management and operation of a mutual fund,” Henry says. Many retirement plans offer a wide variety of investment options, including low-cost exchange-traded funds and index funds that can be a fraction of the cost compared with actively managed mutual funds, he says.