Retiring Rich: Are You Ready for More Transparency in Your 401(k) Fees?

Did you know you pay fees to participate in your 401(k) retirement plan? Well, if you didn’t know that, you’re not alone. According to a recent survey by Transamerica Center for Retirement Studies only 26% of workers are aware that they pay fees to participate in their retirement plan. So would you do things differently if you knew what it cost you?

Beginning July 16, 2011, the Department of Labor will require plan providers to disclose fees that are deducted from a participating employee’s retirement account. It will then be possible for employers to see a written disclosure of all of the services that are being provided by the plan provider or its affiliates, and how much each service costs. And then the next logical step will be legislation to make that information available to individual employees. If that happens, you will be able to see the cost for various funds or investment options as well as other information you can use to make investment decisions.

This will be an important step because fees can add up over time and they can take a big bite out of your profits. According to the Vanguard Group, a 60-year-old investor with a $500,000 portfolio and a fund expense ratio of 1.19%, the industry average, would pay $6,055 in expenses this year. In contrast, someone with an expense ratio of 0.23% would only pay $1,170 in fees. Warning: While fees are certainly important because of the impact they can have on your returns, resist the urge to make decisions based on fees alone. They are just one factor in developing a retirement investment strategy and they should not be your only consideration.

So what should you consider when choosing investments for your retirement? Here are three basic strategies to get you started:

Develop a retirement plan — one that focuses on what you want your retirement to look and feel like. At a minimum, you need to know how much money you will need to live the lifestyle you want in retirement, how much money will be coming in, and any gaps you need to fill with your personal investments.
Aim for a diversified portfolio. Allocate your investments among asset categories and sub-categories based on your goals, your risk tolerance level, and your time horizon.
When choosing individual investments, look for asset categories that fit those outlined in your asset allocation plan (#2 above), investments that have a long track record so you have an idea of how they might perform in different markets, and oh yes, the best ones in each category with the lowest fees.

P.S. Want more investment tips and strategies? Join Wise, Wealthy Women live at the Investing 101 workshop in Atlanta on August 21^st. For more information visit www.WiseWealthyWomen.com.

For more on planning and investing for retirement, check out Retiring Rich each week at BlackEnterprise.com.