The plan 401(K) is gaining popularity with more and more employees taking part and contributing a part of their salary towards securing their future after retirement. This plan also provides you with a chance to make use of these funds and contribute to their growth by directing your own investments. If you want to direct your own investments, you will have to plan your objectives, learn to weigh the risk and judge the performance of the investment options available so that you may be able to take sound decisions.
The factors that might generally affect the returns on your investment are the fees and expenses. They will also have an impact on your retirement income. Therefore it is necessary for you to study your investment options carefully keeping in mind the fact that cheaper investment options may not necessarily be better options. You must compare the total cost and all available services not forgetting the fees involved in the transactions.
Fees will have to be considered because while your contributions and earnings on the investments provide the required growth to your account, expenses and fees contribute to substantial reduction to that growth. Let us take for example that you have 35 years left for retirement and at present you have $ 25,000 in your 401(K) account. If your investment growth during this period is pegged at 7% with the fees and expenses at 0.5%; your account balance with no further contributions to your account, will have grown to $ 227,000. However, if your fees and expenses increase by 1% and are now at 1.5% then your account will have only $ 163,000. The 1% increase in fees and expenses will have reduced your retirement account balance by 28%. Therefore, of the many investment options now being offered under plan 401(k) with the promise of excellent services to be provided, it will be better to consider the cumulative cost of fees and expenses on your retirement savings, before opting to invest in them.
The 401(k) plan fees and expenses are of three types. a) Plan Administration Fees consist of day to day expenses that are needed to for administering the whole plan. These include accounting, legal services, electronic access to plan information and other such expenses b) Investment Fees are by far the largest component of expenses that are required to manage the Plan investments Therefore you must pay special attention to this aspect as they are charged on percentage basis on investment. They are also deducted directly from your investment returns. As these fees are not specifically shown on the in investment statements, they are not easily apparent c) Individual Service Fees consist of fees charged to a participant for taking a loan or for executing the investment directions given by the participant.
To keep a check and save you from making risky or expensive investments the employers have been given the task of keeping an eye on all investments. They are required to comply with the IRS rules. The sole aim is to protect the interest of the participants and their beneficiaries.