Your 401(k) Giveaway

By Michelle Singletary
Thursday, September 20, 2007

By now if you are investing in a 401(k) or similar workplace retirement plan, you know that the ups and downs of the stock market or economy can affect the returns of your investment portfolio.

You may also know that it's important to diversify, spreading your money among various investment options so if one company or industry suffers, your entire portfolio doesn't suffer along with it.

But many investors still don't understand how fees charged by their portfolio managers fit into the investment picture. They may know that fees play a part in their return, but they still haven't really paid much attention to the charges they incur from the people handling their retirement investments.

A recent survey conducted for AARP found that 83 percent of 401(k) plan participants did not know how much they pay in fees and expenses related to their plan. The survey -- "401(k) Participants' Awareness and Understanding of Fees" -- also found that more than half of 401(k) plan participants didn't think they knew enough about the impact that fees can have on their retirement savings.

"With Americans more responsible than ever for making better choices to secure their financial futures, financial literacy and an understanding about those decisions is increasingly important," said David Certner, legislative counsel and policy director for AARP.

"Consumers need to get more informed and ask questions."

And boy, are there a lot of fees to consider. As AARP points out, 401(k) plans generally include three types of fees: investment, administrative and individual. These fees range from covering day-to-day management of the investment to operational expenses to charges for individual services, such as when you take out a loan.

How much of a difference can fees make?

Take a look at this example by the federal Employee Benefits Security Administration (EBSA). Let's say you have 35 years until retirement and a current 401(k) account balance of $25,000. If the returns on your investments average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if you didn't contribute another penny. But what if the fees and expenses were 1.5 percent? Your account balance would grow to only $163,000. That 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

EBSA has put together a booklet with an explanation of the various 401(k) fees. If you do nothing else, read this publication. There is a helpful 401(k) fee checklist. To get it online, go to

So what else can you do? Here are some other tips recommended by AARP:

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