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
FFTHX $20,035 $1,079 $40,140 $3,240
FSCRX $19,448 $1,483 $37.882 $4,369
FCPVX $19,371 $1,536 $37,524 $4,513
FRESX $19,876 $1,188 $39,508 $3,550
This means if I collect all the money in the funds I own after 20 years, I could pay any where between 8% (FFTHX) to 12% (FCPVX) of the total fund value in fees accumulated over 20 years. That's definitely a very high percentage.
If I don't run these calculations, I have no idea how much I will pay later for my 401(k) plan. Do you have a clue how much you are paying for your plan? To find out,
  1. 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);
  2. Compare your fund's expenses with its peers in the same category at
  3. 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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5 Responses to “Am I Paying Too Much for My 401(k)?”

  1. Donna |  Nov 21, 2006 at 5:47 am

    Hi. The fees can be very painful. I have Vanguard which is traditionally viewed as low fee and my ER’s are from .18-.25 depending on my fund (very low). But we checked out my husband’s choices, and his fund actually had a load — an up front expense to buy into the fund. It was 4.75% and then the ER was something like 1.85%. Thus, to make money, he had to first make almost 6%. Nuts! We changed him to the lowest fee funds we could (and tried not to cry over the other funds’ fees) and he spoke to his bosses. The company is now looking into the choices, etc. to try to give better, lower expense funds, as options and to avoid, altogether, these high front-loaded funds.

    Only ignorance stops us from making better choices. But employers really need to get on the ball about what they are asking their employees to invest in.

  2. The Sun |  Nov 21, 2006 at 1:11 pm

    Hi Donna:

    It’s true that when it comes to 401(k) investments, most of the time we simply don’t have the options to choose low-cost funds due to the structure of the plan. But it’s a good idea of talking to the employers about our concerns on the costs of our retirement. If every employee tells the company to get low-fee funds instead of using funds from loads, the company may listen and give everybody some better options on how to invest their money.