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Financial Planning

Factors That Impact 401(k) Fees

 

Increasing numbers of Fortune 500 employees are contributing to their retirement through 401(k) plans. Participating Fortune 500 employees in 401(k) plans assume responsibility for their retirement income by contributing a portion of their salary and, in many cases, by managing their own investments.

If you are among the Fortune 500 employees who direct your investments, you must evaluate the investment objectives, risk and return characteristics, and long-term performance of each investment option in your plan. One of the factors that will affect your investment returns and retirement income is fees and expenses. This article will discuss a few of the main factors that may affect the severity of your Fortune 500 401(k) plan's fees:

"Fees and expenses are one of the factors that will affect your investment returns and will impact your retirement income." man in white dress shirt holding black pen

Funds with an investment adviser who continuously researches, monitors, and actively trades the fund's holdings to pursue a higher return than the market typically have higher expenses. The higher fees are a result of the more active management and sales commissions associated with the increased trading activity. As an Fortune 500 employee, you may wish to consider the fact that while actively managed funds aim to outperform the market, neither active management nor higher fees necessarily guarantee higher returns. 

In general, funds that are have lower management fees. Passively managed funds replicate the holdings of an established market index, such as the Standard & Poor's 500, in order to replicate the index's investment performance. Thus, passively managed funds require little in the way of research or trading. Employees of Fortune 500 should consider the information when determining who will manage their funds and whether their fees are reasonable for the services rendered.

If the services and investment options under your plan as an Fortune 500 employee are offered through a bundled program, then some or all plan service costs may not be separately charged to the plan or your employer. For instance, these costs might be covered by the asset-based fees charged on investments. Examine the services received in relation to the total amount paid.

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If the services and investment options under your plan as an Fortune 500 employee are offered through a bundled program, then some or all plan service costs may not be separately charged to the plan or your employer. For instance, these costs might be covered by the asset-based fees charged on investments. Examine the services received in relation to the total amount paid.

Plans with greater total assets may be able to reduce fees by utilizing special funds or classes of stock in funds that are typically sold to larger investor groups. Or funds, which are also marketed to individual and small-group investors, are typically listed in the daily newspaper and have higher fees. As an Fortune 500 employee, you should communicate your preference to your employer.

Optional features, such as participant loan programs and insurance benefits, incur additional costs in variable annuity contracts. Consider their utility for you as an Fortune 500 employee. If not, inform your employer.

For more information about this topic, view our e-book here: https://retirekit.theretirementgroup.com/the-401k-plan-fees-e-brochure

Added Fact:

Research shows that one factor impacting 401(k) fees is the size of the plan's participant base. According to a study conducted by the Investment Company Institute (ICI) in 2022, larger 401(k) plans tend to have lower fees compared to smaller plans. This is because larger plans have more bargaining power when negotiating fees with investment providers and recordkeepers. The study found that plans with over 1,000 participants had an average total plan cost of 0.48% of assets, while plans with fewer than 50 participants had an average cost of 1.46% of assets. Therefore, as a 60-year-old Fortune 500 employee, it may be advantageous to consider the size of your plan's participant base as it can potentially influence the fees you pay for your 401(k) plan. (Source: Investment Company Institute, "A Look at Fees in Defined Contribution Plans: 2020," May 2022)

Added Analogy:

Imagine you're planning a luxurious cruise vacation to celebrate your retirement. Just like your 401(k) plan, the fees and expenses associated with this cruise can greatly impact your overall experience and enjoyment. Think of the investment adviser as the cruise director, continuously researching and monitoring activities to provide a memorable trip. Their efforts may result in higher expenses, much like the increased costs associated with an active management approach. However, it's important to remember that a higher price tag doesn't always guarantee a better cruise. Alternatively, you have the option of a packaged deal, where the cruise services and options are bundled together. This can cover some costs, similar to how asset-based fees may cover plan service costs in your 401(k). Just as you would evaluate the value of services received in relation to the total amount paid for your cruise, it's crucial to assess the reasonableness of fees in your retirement plan. Additionally, like a larger cruise ship accommodating more passengers, bigger 401(k) plans tend to have lower fees due to increased bargaining power. So, choose your retirement plan like you would select the perfect cruise package, considering the factors that impact fees to ensure a smooth voyage into your golden years.

This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

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The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

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