RETIREMENT TIPS: Understanding Retirement Plan Fees

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AlanKondo-238x300By ALAN KONDO, CFP, CLU

Many employees leave their retirement money in their 401(k), 403(b) or 457 employer-sponsored plans long after retirement. Sometimes this is just from inertia. Often it is done in the belief that their employer-sponsored plans are not costing them anything.

These employees would probably be shocked to learn that their plans had layer upon layer of fees, and are among the most expensive investments. If you ever wondered why your 401(k) experienced sluggish growth while the market was booming, these fees could be one reason.

The employees’ assumption that their retirement plan was free was often based on the fact that employers did not have to disclose fees until recently. Thanks to new legislation, this information is now required to be reported to you at least once per year. Being aware of these fees can provide insight into how your plan is managed and can help you decide how to position your assets after retirement.

There are generally three categories of fees in 401(k)s and other employer-sponsored retirement plans:

1. Administrative expenses: The costs of operating the plan are referred to as administrative expenses. They include fees for legal, accounting, and record-keeping services as well as participant communications and education. These fees are paid by every participant in a plan on a proportional basis and are usually expressed as a dollar amount for the plan as a whole.

2. Individual expenses: Individual expenses are the costs that may be charged against the plan account of individual participants for actions they prompted themselves, such as plan loans, fees for investment advice, commissions, sales charges, redemption fees, and optional rider charges in any annuity contracts that may be a part of the plan.¹

3. Investment product fees: Every investment option offered through your plan charges its own level of fees. The most common types of investment product fees are as follows:

● Total operating expenses: This fee combines operating expenses and the expense ratio for a given investment. Operating expenses describe the administrative costs to the investment management company for the day-to-day investment of the funds, such as transaction costs for buying and selling shares.

● 12b-1 fees: This charge covers the servicing, distribution, and marketing costs of the fund.

Revenue-sharing fee: This fee is unique to employer-sponsored retirement plans. It is paid to the broker that sold the plan to the employer, and the cost is passed on to the employees.

● Annuity fees: For plans that offer the option to invest in annuities, fees would also include the cost of providing guaranteed death benefits prior to retirement and guaranteed lifetime benefits to retirees who live longer than their life expectancies.

Many employees move the money from their retirement plans to Individual Retirement Accounts (IRAs) after retirement for the following reasons.

Reducing your investment cost is one of the most reliable ways to improve your investment returns. Even if you invest in exactly the same holdings as you had in your 401(k), holding them in an IRA can increase performance just because the fees may be lower.

Tax-free transfer: When you do a qualified rollover from your 401(k) to an IRA, there is no immediate taxation, and your money continues to grow tax-deferred just as it did within the 401(k).

More control over your money. When Enron was going bankrupt, the company froze the employees’ 401(k), and they were unable to sell their Enron shares. This is not to imply that your company is like Enron, but since people are now spending 25 to 30 years in retirement, something could happen to even the most stable company over such a long span of time.

Your own circumstances are unique. Consult with your Certified Financial Planner™ to determine the best course of action for your retirement assets.

¹ An annuity is a long-term, tax-deferred investment vehicle designed for investment purposes and contains both an investment and an insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to an annuity’s separate account or its underlying investments. The investment returns and principal value of the available sub-portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.

² Investing in mutual funds involve risk, including loss of principal. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. For more complete information about any mutual fund, including risks, charges and expenses, please contact your financial professional to obtain a prospectus. The prospectus contains this and other information. Read it carefully before you invest.

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The opinions expressed above are solely those of Kondo Wealth Advisors LLC (626-449-7783, [email protected]), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.

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