The most available investment in 401(k) plans is the mutual funds. When it comes to mutual funds not all their fees are built the same...
MUTUAL FUND FEES
Let’s breakdown these fees, more specifically target the ones you should be avoiding or paying as little as possible on.
Mutual fund fees you should be on the look-out for:
• 12b-1 (marketing & distribution expense)
• Redemption Fee
• Account Fee
• Exchange Fee
• Purchase Fee
• Sales Load
12b-1 fees: generally range between 0.25% and 075% of total plan assets, with the cost varying depending on the fund and advisor. These fees pay for the marketing expenses of the fund.
If you prefer not to have your investment dollars go toward paying someone else’s marketing expenses you may want to make a witch. Many index funds do not charge this fee.
Redemption Fee: some funds charge you a fee when you sell your shares within a certain timeframe from the date or purchase, which could be “anywhere from a few days to over a year” according to the Financial Industry of Regulatory Authority.
The fee typically costs 1% to 2% of the transaction amount.
Lump this into those one-time fees mentioned earlier that does not show in your expense ratio. However, it certainly adds to your all-in plan costs.
Account Fee: charged to maintain your account, especially when the balance falls below a specific minimum investment amount.
The balance is not a low amount either. Often $10,000 minimums are required to avoid the fee. This is usually a one-time annual charge of $20 to $25.
When there is a market crash this can be insult to injury. Not only did your investment lose a bunch of value, but now it is being charged for doing so.
Exchange Fee: this is charged when you want to move your investment from one mutual fund to another within the same family of funds.
You’d think the investment company would be happy you are keeping money with them. Nope, they charge you for switching to another one of their funds.
Purchase Fee: is a fee paid directly to the fund when you purchase it, this is not to be confused with a sales load.
Sales Load: these are commissions paid to a broker when you buy or sell mutual fund shares. There are front-end and back-end sales loads.
Front end are paid when you purchase the fund and can cost 2% to 5% of your total investment.
Back-end or “deferred sales charge” are paid when you sell your fund shares within a certain period up time, often up to seven years from original purchase.
Funds that do not have these charges, called “No-Load” funds are rather prevalent now. Avoiding sales loads is easily attainable if you look out for it.
Death by a thousand cuts
As you can see these fees can start to really add up and before you know it 2% or more of your investment has been eaten up. If this happens with each individual fund you hold within your 401(k), how much is that costing you per year and over the course of your career?
By now you should have an understanding of where to find your fees and which ones to keep an eye out for.
The next post in this series will give you specifics steps to reduce those fees......