A Guide to Understanding your 401(k) Fee Statement
As part of the Department of Labor’s (DOL) participant fee disclosure initiative, each year you will receive a comparative chart outlining performance and fee information for each investment offered in your retirement plan. Most 401(k) provider disclosures follow the Department of Labor’s model chart format and the guide below is designed to help you navigate the information with the goal of answering some of the most commonly asked questions about your retirement plan fees.
What is an “average annual total return” and why are multiple years listed?
The “average annual total return” is the yearly average percentage increase or decrease in an investment’s value (i.e., the profit or loss for each fund). For example, if an investment lists 18.7% under the 1-year category, it means the value of that investment increased 18.7% in the previous year. A fund listing -2.48% in the 5-year category has had an average decrease in value over the past five years. For each plan investment, your employer must provide the average annual returns for the past year, the past five years, and the past ten years (or since inception if a shorter period) to help you compare how each fund has performed historically. Just because a fund has done well in the past year or over the past few years doesn’t mean it will do well in future years. This is just one of the factors to consider when evaluating investments.
What is a “benchmark” and how does it affect my investments?
A benchmark is a group of investments whose performance is used as a standard or index to compare investment performance. You may be familiar with the Dow Jones Industrial Average or the S&P 500 Index. These are two well-known benchmarks. The S&P 500 Index, for example, is made up of 500 common stocks considered representative of the U.S. stock market in general. A relevant benchmark must be provided in the comparative chart for each variable investment in your plan’s investment lineup.
Different benchmarks will be listed for different types of investments, so you can see how other funds in a similar category did compared to your plan’s investment options. You should compare the performance of your plan’s investments to the benchmark. If an investment consistently performs poorly compared to the benchmark, it may not be a good investment option for you to choose.
Am I being charged fees for my plan investments?
There is a cost associated with operating a mutual fund. This is true whether the investment is purchased through a retirement plan or through another type of investment account. The cost of operating a fund is referred to as the “total annual operating expense” or “expense ratio.” These costs reduce the overall return (the average annual total return) of the fund. Total annual operating expenses will be listed on the comparative chart for each plan investment. It will be presented as both a percentage of assets and as a dollar amount (based on each $1,000 invested). For example, if a fund lists the total annual operating expense as 1.45%, it means that 1.45 percent of the fund’s assets or $14.50 per each $1,000 in a fund will be applied to cover the expenses of operating the fund.
In addition to the costs of operating and distributing a fund, there may also be service charges or fees referred to as “shareholder-type fees” that are assessed when you purchase or sell shares. These fees are typically charged directly to your account and are in addition to the annual operating expenses. For example, a sales charge may be assessed when you initially purchase shares or could be assessed when you sell the shares, referred to as a deferred sales charge. A redemption fee, another type of shareholder fee, is deducted when shares are sold and is paid to the fund to defray the cost of redeeming the shares. For example, a fund that charges a two percent redemption fee for sales within two months of purchase would list that in the shareholder-type fee column of the comparative chart. Some funds also charge other transaction fees to defray cost. In many cases, 401(k) investments will not be subject to shareholder-type fees, and the comparative chart will either be left blank or contain the phrase “not applicable” or “N/A” in the shareholder-type fee column.
For more information call the Victory Capital Investment Professionals line at 1-800-991-8191.
FOR INVESTMENT PROFESSIONAL USE ONLY. Victory Capital, Inc. is a Registered Investment Advisor. The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations in this report are subject to change without notice and are not intended as individual investment advice. Not to be used as legal or tax advice.