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The miracle of compounding interest turns small percentages into big returns in retirement plans. But it’s a double-edged sword, and removing small percentages in the form of fees can do serious damage over the long term. SmartMoney’s Robert Powell runs through the worst.
“It's said that what you don't know can't hurt you. Not so,” Powell writes. “What you don't know can cost you, and sometimes cost dearly. Case in point: Advisers and others say there's a host of unknown costs and fees lurking inside your 401(k) plans, IRAs and other such retirement accounts. And often, those fees can make a world of difference in your overall investment returns.”
He notes many Americans are simply unaware of the fees they pay to their plan providers, and points to the startling statistic from AARP “that more than seven in 10 (71%) 401(k) plan participants incorrectly reported that they did not pay any fees.”
1. Account termination fees
2. Account maintenance fees
3. Various account transfer fees
4. Roth conversion fee
5. Federal fund wire fee and overnight delivery fee: “For account owners who are unable to wait for regular delivery and instead choose to have the funds sent via federal fund wire, which usually means same day receipt, a fee might be charged to the IRA, as well as by the bank that receives the funds. For overnight delivery of checks, an express delivery fee might apply,” according to Appleby.
[Love these next two]
6. "Special investment" fee: According to Appleby, this fee applies to non-traditional/non-publicly traded investments such as private placements, real estate and certain limited partnerships. She said this fee can range from a few hundred dollars to more than $2,000 per year.
7. "Special investment" set-up fee: As with the special investment fee, this fee also applies to non-traditional investments that are not publicly traded. But unlike the special investment fee, it's not an ongoing fee. Such fees are usually one-time charges applied for reviewing and setting up the investment, Appleby said.
8. Form 990-T filing fee: For accounts that hold non-traditional/non-publicly traded investments, the custodian/trustee may need to file IRS Form 990-T to report unrelated business income. This fee can be up to a few hundred dollars, Powell writes.
9. Loan processing fees: Account owners who take loans from their 401(k)/403(b) or other employer plan account may be charged a loan processing fee, said Appleby.
10. Recordkeeping fee: Powell concludes by noting Appleby said small business owners with solo-K/individual-K plans may be charged a recordkeeping and filing fee of several hundred dollars, if they use the services of a recordkeeper. This is in addition to fees charged by the custodian.
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It's amazing anyone has a penny left to call their own after all those fees are deducted! That's ridiculous.
My thoughts exactly, bringmeroses. Aren't they by law supposed to disclose all those from the beginning so it's not a shock?
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My thoughts exactly, bringmeroses. Aren't they by law supposed to disclose all those from the beginning so it's not a shock?
I thought so too, frazzledmom. And the fact that "He notes many Americans are simply unaware of the fees they pay to their plan providers, and points to the startling statistic from AARP “that more than seven in 10 (71%) 401(k) plan participants incorrectly reported that they did not pay any fees" makes it clear that's not happening.
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Good point but it is the investor's (employee for 401(k)) responsibility to obtain a prospectus and read it. If it's not understood, ask your questions.That document has all of the fees and loads noted.
A cardinal rule that I have is to NEVER invest in anything (mutual fund, stock, bond, real estate etc) that I do not fully understand. This is really only common sense, but many folks forget how basic it is.
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My thoughts exactly, bringmeroses. Aren't they by law supposed to disclose all those from the beginning so it's not a shock?
Apparently there was a bill in the works in 2007/2008 and it never got anywhere. You can read the summary or full text at this link.
H.R. 3185: 401(k) Fair Disclosure for Retirement Security Act of 2007
To amend the Employee Retirement Income Security Act of 1974 to provide special reporting and disclosure rules for individual account plans and to establish in the Department of Labor an Advisory Council on Improving Employer-Employee Retirement Practices.
http://www.govtrack.us/congress/bill.xpd?bill=h110-3185
Summary:
7/26/2007--Introduced.
401(k) Fair Disclosure for Retirement Security Act of 2007 - Amends the Employee Retirement Income Security Act of 1974 (ERISA) to prohibit an administrator of an individual account plan that includes a qualified cash or deferred arrangement to enter into any contract for services to the plan without a written statement that identifies who will be performing such services, describes each such service, and specifies the expected total annual cost of such services. Requires the Secretary of Labor to prescribe a model statement that may be used for purposes of satisfying such requirements. Limits the requirements for such a statement to contracts for services if the total cost for such services equals or exceeds $1,000.
Requires an administrator of an individual account plan that permits participants or beneficiaries to exercise control over their account assets to: (1) provide to each such participant or beneficiary a notice of the investment options available for election, including a fee menu and an annual benefit statement; and (2) include at least one investment option that is a nationally recognized market-based index fund that meets certain requirements. Requires the Secretary to make available to small employers: (1) educational and compliance materials to assist in selecting and monitoring service providers for individual account plans, investment options, and fees; and (2) services to assist in finding and understanding affordable investment options for such plans. Establishes in the Department of Labor (DOL) an Advisory Council on Improving Employer-Employee Retirement Practices. Requires the Council to issue an annual report on the state of U.S. retirement income security.
It's amazing anyone has a penny left to call their own after all those fees are deducted! That's ridiculous.
When you have only two pennies left in the world, buy a loaf of bread with one, and a rose with the other.