Am I Paying Too Much for My 401(k)?
An article in yesterday's USAToday prompted to check the fees I paid for those funds in my 401(k) plan. Unlike mutual funds holding in my taxable accounts, in which I have the flexibility to choose from perhaps hundreds of funds in the same category from as many companies, the number of funds in my 401(k) plan, which is managed by Fidelity and, thus, are all Fidelity funds, is limited. This means sometimes I have to pay more in fees in order to get the diversification I want. For taxable accounts, the wide selection makes it possible to go after low-fee funds, not so for 401(k) plan. Not that I don't care for various fees I have to pay to own the fund (I admit that I didn't pay much attention to fund expenses in my 401(k) plan), I just don't have better alternatives. For example, I currently have four funds in my 401(k) and from the date provided by Fidelity, the fee structures of the four funds are:
|Fund||Managemnet fee||Expense ratio|
|Freedom 2035 (FFTHX)||0.01%||0.75%|
|Small Cap Retirement (FSCRX)||0.62%||1.06%|
|Small Cap Value (FCPVX)||0.81%||1.09%|
|Real Estate Investment (FRESX)||0.57%||0.83%|
Though there are two columns of fees for each fund, what really matters is the expense ratio (ER). According to Investopedia definition, mututal fund expense ratio is
The percentage of total fund assets that is used to cover expenses associated with the operation of a mutual fund. This amount is taken out of the fund's assets and lowers the return that fund holders achieve. These expenses include management fees and operating expenses. The management fee is the fee that is charged to the fund by the portfolio manager, and it is often a fixed percentage. The operating expenses are the expenses that the fund incurs through operation and this can include brokerage fees, taxes, investor services and interest expenses.
That is, management fee is part of the overall mutual fund expense ratio, which also incudes administrative costs and 12b-1 distribution cost (the fee that mutual fund company collects from investos to advertise the fund). Using the NASD Mutual Fund Expense Analyzer, I calculated the costs of own $10,000 of the above four funds for 10 years, assuming a reasonable 8% annual return:
|Fund||10-yr value||10-yr expenses||10-yr value||20-yr expenses|
- Read your fund's prospect and find out the expense ratio (if your fund has a ticker symbol, you can find the ER from places like Morningstar);
- Compare your fund's expenses with its peers in the same category at SmartMoney.com;
- Use NASD Mutual Fund Expense Analyzer to calculate your fund's expenses (first, find the fund family, like Fidelity or Vanguard, or use the fund's symbol to search for the fund; then enter your investment amount, rate of return and holding period to calculate).
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