The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 60. Expenses

IF THERE IS A CATCH TO 401(K) PLANS, it is this: they cost too much. When the plans were introduced more than twenty-five years ago, the employer typically paid the plan's fees. Remember that employers were eager to encourage their employees to set aside money for their retirement. Also, the early plans were not as expensive as they have become today.

There are three basic cost components to a 401(k) plan:

• Investment management costs. The cost of managing the money in the plan, which is expressed as a percent of assets.

• Trustee costs. Costs that can be separated into custody charges and general processing fees. Services in this category—such as cutting a check for a loan—can be charged per activity. In that way, the person who uses the service pays the fee rather than making it an implicit cost of the plan.

• Administration costs. Includes record keeping and employee communication and education, as well as many of the fancy frills.

When a 401(k) plan uses mutual funds, many of these fees are wrapped into the mutual fund expense ratio and paid by the mutual fund investors. That is money that is subtracted from mutual fund assets each year. It is expressed as a percent of assets, usually in basis points. A basis point is 1/100th of one percent. So if the annual expense ratio is 1 percent, it might be expressed as 100 basis points. An expense ratio of 0.25 percent is expressed as 25 basis points.

Many 401(k) plans use open-end mutual funds that are also available to regular ...