As readers of this blog know, I get pretty fired up about 401(k) fees. Fees are the enemy of frugality. And often, they lay low, lurking in the fine print and counting on investors to overlook them when making important investment decisions.
Recently, the Department of Labor came out with a great publication titled, “Maximize Your Retirement Savings -- Tips on Using the Fee and Investment Information From Your Retirement Plan”. While it might not be the spring break beach read you are accustomed to, the wise counsel in this document is worth more than a passing glance from under your sun hat.
I won’t recap the whole piece here but I’ll share the two points closest to my heart. On their own, these tips on 401(k) fees and investments have the power to remake your retirement plan. It’s what we tell our clients at Employee Fiduciary before they ever set up or convert their 401(k) plans:
1. Do your research on each investment option before you invest.
2. Never invest in anything you don’t understand.1
Let’s break it down a little further because the most important investment decisions are worth spending time on.
With the abundance of information available on the web, there is simply no excuse for ignorant investing. A Google search (perhaps how you got here?) will reveal boatloads of information on just about any investment option you can imagine. Whether you setup your own plan or participate in one offered by your employer, you need to read, read and then read some more about the investment options available to you. The kind of information you should look for? Try:
- the rate of return over a given period of time (1 year, 5 years, 10 years, etc.)
- how that rate of return compares to an appropriate benchmark (for example, the S&P 500, the Russell 2000 and so on)
- fees and expenses (the total annual operating expenses of the investment fund as well as shareholder-type fees which can include service charges and sales charges)
Knowledge is power, so make sure you’ve done your research thoroughly before you direct a single deposit into your account.
Do yourself a favor: put the time in now. Read all you can on how to make wise investment decisions. If you don’t understand something, ask an expert and learn about it. You’ll know you’ve got it down when you can explain to someone else what your investments are, in laymans terms.
Tell me about your experience in the comment box below. What tips on 401(k) fees and investments would you share?
A cousin to a more widely known quote from Warren Buffett: “Never invest in a business you cannot understand.”