A Look at 401(k) Plan Fees: Common Investments and Related Fees—Part 1
Most investments offered under 401(k) plans today pool the money of a large number of individual investors. Pooling money makes it possible for individual participants to diversify investments, to benefit from economies of scale, and to lower their transaction costs. These funds may invest in stocks, bonds, real estate, and other investments. Larger plans, by virtue of their size, are more likely to pool investments on their own—for example, by using a separate account held with a financial institution. Smaller plans generally invest in commingled pooled investment vehicles offered by financial institutions. Generally, investment-related fees, usually charged as a percentage of assets invested, are paid by the participant.
Mutual Funds
Mutual funds pool and invest the money of many people. Each investor owns shares in the mutual fund that represent a part of the mutual fund's holdings. The portfolio of securities held by a mutual fund is managed by a professional investment adviser following a specific investment policy. In addition to investment management and administration fees, you may find these fees:
- Some mutual funds assess sales charges. These charges may be paid when you invest in a fund (known as a front-end load) or when you sell shares (known as a back-end load, deferred sales charge, or redemption fee). A front-end load is deducted up front and, therefore, reduces the amount of your initial investment. A back-end load is determined by how long you keep your investment. There are various types of back-end loads, including some that decrease and eventually disappear over time. A back-end load is paid when the shares are sold, so if you decide to sell a fund share when a back-end load is in effect, you will be charged the load.
- Mutual funds also may charge what are known as Rule 12b-1 fees, which are ongoing fees paid out of fund assets. Rule 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors and to pay various service providers of a 401(k) plan pursuant to a bundled services arrangement. Some mutual funds may be advertised as no-load funds. This can mean that there is no front- or back-end load. However, there may be a 12b-1 fee.
Target Date Retirement Funds
Target date retirement funds, which are often mutual funds, hold stocks, bonds, and cash investments. These funds are designed to make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time. Target date funds may charge different fees even with the same target date. If a target date fund invests in other mutual funds (often called a fund-of-funds), fees may be charged by both the target date fund and the other funds.
U.S. Department of Labor. (n.d.). A look at 401(k) plan fees. Retrieved October 19, 2016, from http://www.usa.gov/