Your 401(k): Clearing the Fog Around Returns, Fees

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Do you have any idea how much you're paying in fees for investments in your 401(k) plan? Do you know your investments' true returns? Knowing the answers to these questions – and taking the right actions -- can mean a substantial difference in how much money you have for retirement.

Next spring, it will be far easier for plan investors to know these fees relative to how their investments are performing. A new rule of the U.S. Department of Labor that takes effect in April requires employers to present employees in 401(k) plans with charts showing the fees and returns for each investment.

This may sound pretty basic, but it actually will be a boon to investors because it's currently extremely difficult, if not impossible, to get this information all in one place.

Specifics on fees versus performance are a black box for many 401(k) plans. The reason: Statements investment companies send out typically display the value of accounts after fees are deducted -- without itemizing fees. As a result, investors are in the dark about the actual performance of their holdings and how much they're paying in fees.

Though federal rules require disclosure of some fees, not all of this information is readily available. Instead, you must dig for it–either by contacting the investment company or asking your employer, who may not be aware of all the fees involved. If this sounds like work, that's because it is.

It's critical for investors to know exactly how much they're paying in fees because this factor alone can make a significant difference in investment returns over time. If your $10,000 investment earns seven percent a year before fees for 30 years, an extra one percent in fees would lop $18,600 off your total returns.

But too great a focus on fees alone distracts attention from the more important issue of fees relative to performance. If an investment is underperforming, low fees provide little solace. Investors are like business owners and fees are like business costs. Just because they rent the cheapest space doesn't mean they'll make the most money.

All this assumes that investors are taking full advantage of their plans in the first place. Many aren't. The biggest problem with 401(k) plans is that they are under-used. Too many people fail to invest enough money in their accounts to build the nest eggs they need for retirement.

This means they may pass up the employer match (free money) and lose the opportunity to lower their taxable incomes each year and invest more for retirement – when most will pay lower taxes on money they take out of their plans because they'll be in a lower income tax bracket.

You can't control investment performance, but you can control your how much money you invest in your 401(k) from each paycheck. Markets have risks. But the biggest risk is failing to invest, setting you up to lag behind in the game of wealth accumulation.

For those who are under-investing in their plans, focusing on fees versus performance may be moot. Yet the new employer disclosure rule may spur many to action, alerting them to the importance of investing greater amounts and prompting them to lobby employers to offer plans with better investment options.

Managing 401(k) plans is difficult enough as it is, considering that employees must act as their own financial advisors in making difficult decisions. For those already taking the full advantage of their plans, the new disclosure rule will help them make more informed choices, enabling them to accumulate more wealth for retirement.

The opinions expressed here are solely those of Mr. Schwartz.

Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group. He advises individual investors and endowments, and serves as the advisor to CIFG Funds. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation to advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be e-mailed at