How Your 401(k) Fee Disclosure Statement Can Save You Money
The U.S. Department of Labor has required 401(k) plans to send an annual fee disclosure statement to 401(k) participants for the past three years. This document lists the costs and investment performance of every fund in your 401(k) plan in a single document, and it can be used to find the lowest cost and best-performing funds in your plan. Here's how to use your annual 401(k) statement to save money on your retirement investments.
Calculate how much each fund costs to own. Your 401(k) fee disclosure statement lists the annual gross expense ratio of each fund in one column, which can help you single out funds with especially low costs. The expense ratio is also listed as a dollar amount for each $1,000 you have invested in the 401(k) plan. This makes it easy to calculate how much you are paying to invest in the fund. For example, if a fund has an expense ratio of 0.55 percent, you are paying $5.50 for every $1,000 you have in the fund. If you have $10,000 in that fund, you simply multiple the dollar value by 10 to discover than you are paying $55 per year to own that investment. "If your plan includes low-cost index funds, something below 0.2 percent or 20 basis points, that is likely to be a good option," says Quinn Curtis, a professor at the University of Virginia School of Law.
Avoid high-cost funds. The expense ratio you are paying reduces your investment returns. While costs vary from fund to fund, it's a good idea to avoid funds with unusually high costs. "Most people who are invested in funds with fees above 1 percent a year are making a mistake," says Ian Ayres, a law professor at Yale Law School. "You still should take advantage of matching, but if your plan has only funds with more than 150 basis points in cost, it's a high-cost plan, and you should think carefully before investing further."
Compare costs within asset classes. To determine if a fund has a reasonable expense ratio, you need to compare it to similar types of funds. "If you have two or more funds in a certain asset class, then expense ratios can help in choosing which one," says Randy Thurman, a certified financial planner and co-president of Retirement Investment Advisors in Oklahoma City. Many 401(k) statements group their investments by asset class, which helps to make comparisons easier, but sometimes there can be big price differences within an asset class. "A small cap is by definition a little bit more expensive than a large, so you have to compare funds to their peers to see how they rank," says Shikha Mittra, a certified financial planner and president of Retire Smart Consulting in Princeton, New Jersey.
Realize that past returns aren't a guarantee you will earn that amount. The annual statement also lists the investment performance of every fund over the past one, five and 10 years, plus how that performance compares to a relevant benchmark. However, the returns listed on your statement give no guarantee that the fund will produce similar returns in the future. "Paying a lot of attention to the past performance isn't a good way to pick your investments," Curtis says. "Figure out how you want to balance you assets among the different types of funds and then look at the fees."
Learn what behaviors trigger additional fees in your 401(k). Your fee disclosure statement will include information about what actions you might take that could trigger fees. Some funds have sales or service charges if you don't maintain a minimum investment or sell before holding the investment for a specific period of time. There might be short-term trading fees if you pull your money out of a fund within a specific number of days of buying it or excessive trading restrictions. Initiating a loan or in-service withdrawal from the account could also result in additional costs. Learn what will trigger extra fees in your account and what you can do to avoid them.
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