Managing 401K Expenses
In the news today is a proposal by the Labor Department requiring employers to increase disclosure of 401K investment fees. After reading this article, I decided to take a closer look at my own 401K plans, all three of them.
You might ask why I even have (3) plans, and have not yet rolled them over to an IRA. All of them offer two key investments that I require: an S&P500 index fund, and a short term money market fund, or equivalent. These two investments offer a low cost method to split your investments between cash and stocks. At some point these accounts will be moved to an IRA.
First, a word about finding the “cash” investment option in your 401K: be careful not to select a bond fund. Bond funds do not necessarily keep your principal safe, and in fact most bond funds are very much like stock funds in that they can lose and gain value separate from the income that they provide. Find the investment in your plan that indicates in its prospectus something like “invests in stable value contracts”. Most of these investments also contain the words “stable value” in their name. If not, it may be named something like “money market fund”.
Since I invest in only two vehicles at this time which are presumed to be low cost, I thought that I did not need to consider fees. But as I discovered upon further investigation, there is some room to improve my returns by managing costs a little more. All funds are required to provide a prospectus that gives you detailed information about the fund, including fees. If you cannot find this information on your 401K providers site, contact them to get copies of these documents. First, here is what I found out about the fees for each of my 401K plans:
Plan A, Expense Rate
S&P500 Index Fund: 0.15%
Stable Value Fund: 0.12%
Plan B, Expense Rate
S&P500 Index Fund: 0.24%
Stable Value Fund: 0.80%
Plan C, Expense Rate
S&P500 Index Fund: 0.27%
Stable Value Fund: 0.25%
In order to understand your fees completely, find out who manages your funds. If your 401K is a cafeteria style plan (funds from different providers managed by another provider), you may find that there can be two sets of fees. The S&P500 index fund in Plan C is setup that way, and as I discovered only by contacting the 401K manager, there is an extra 2 basis point charge on top of the 0.25% expenses that came along with the fund.
So far so good. All of my current investments charge annual expenses of less than 1%. Not all funds that charge more than 1% fees should be avoided, but investigate them ahead of time before buying them. Don’t unknowingly pay high investment fees particularly since lower cost options are usually available.
The fund that stands out is the Stable Value fund in Plan B. Given that the expected investment return is about 4-5%/year for typical stable value funds, an expense rate of %0.80 is a real drag. I made the following change: moved all the money out of that fund into the S&P500 Fund in Plan B. An equivalent amount was then moved from the Stable Value Fund into the S&P500 fund in Plan A. This change kept my overall ratio of cash/stock the same, but lowered my costs by more than 1/2% for the portion that is invested in “cash”.