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Understanding your 401k plan

Ever since the Revenue Act of 1978, when the 401k plan was established by congress, 401k plans have played a major role in most Americans retirement planning.

Even though over 60 million employees take advantage of their employer’s retirement plan, a surprising number don’t fully understand some of the important details in how their plans work.

A study done by AARP found that 83 percent of plan participants don’t know how much they pay in fees each year. More than half (54 percent) don’t understand the impact that fees can have on long-term investment performance.

Plan fees and expenses can be broken down into three major categories. You’ll have plan administration fees which include items like record keeping, accounting and legal services, trustee services and third party administration.

Plan administration fees cover the day to day expenses of operating a plan. You’ll also have individual service fees that are driven by the participant and usually charged to the participant.

They include fees for services like self-directed account costs, loans, withdrawals and QDROs, which are qualified domestic relations orders.

Third are the investment fees which can be difficult to understand and are by far the largest component of plan fees and expenses. Investment fees include loads and commissions. You should check to see what share class is being used in your plan. “A” shares charge a front end load. “B” shares charge a back end load. “C” shares have a higher ongoing trail fee generally an additional 1 percent.

It’s very important to know how much your mutual funds charge in expenses. Index funds typically are low cost and should be available to plan participants.

Another type of common investment fee is the 12b-1 fee. These are ongoing fees paid out of the fund’s net asset value on a daily basis. They can be used to pay commissions to brokers or other salespeople, to pay for advertising and other costs of promoting the fund, and to pay other service providers in a bundled services arrangement, including recordkeeping and third party administration.

No load funds can have 12b-1 fees. Most load funds have 12b-1 fees in addition to the load or commission. These fees are disclosed in the fund prospectus, but very few participants understand their significance.

There have been numerous academic studies done on the impact of fees on long term investment performance and generally it is best to keep the fees as low as possible. It is very important to understand the fee structure in your plan.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.


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