401(k) Fees and Investment Choices

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401(k) Fees and Investment Choices

401(k) plans are built on a variety of different investments. At a large company, they may offer the stock of that company. But it is most common for them to offer funds that are made of the pooled money of numerous participants. This allows them to offer a large variety of investments in those funds, which can diversify risk. Another advantage of pooling money from numerous participants is to lower the overall costs of transactions.

The investments in these pooled funds are typically stocks, bonds, and money market investments. They may represent a sector of the economy or several different sectors. Here are the most common types of funds and the fees associated with them:

Mutual funds

Mutual funds pool the money of many people and invest it in a selection of different investments such as stocks and bonds. As an investor, you own shares in a fund and therefore share in its earnings and its fees. Every mutual fund has an investment objective, meaning that money in it is invested to achieve a particular goal, such as sustained growth. These are the fees charged:

• Mutual funds charge administrative fees for the day-to-day running of the funds. They also charge investment management fees.
• They may also assess sales charges (front-end loads) when you buy shares or when you sell shares (back-end loads). Back-end loads may decrease the longer you keep your fund, eventually reaching zero. Mutual funds advertised as "no-load funds" do not charge these fees.
• Mutual funds may charge 12b-1 fees, which cover various other expenses, such as advertising and promotion and various bundled services.

Variable annuities

Variable annuities are offered to a 401(k) plan through an insurance company. They can be thought of as a "wrap" that contains a variety of mutual funds that participants can choose from. Because different participants will choose different funds, participants will therefore earn different investment returns. Variable annuities also come with insurance aspects, such as death benefits, a contract term, and interest and expense guarantees. Fees charged by variable annuities include:

• Investment management fees
• Administrative fees
• Insurance-related fees, such as mortality risk charges and costs for handling contacts
• Surrender charges, which are levied if you withdraw money before the term expires

Collective investment funds

Collective investment funds are trusts managed by banks or trust companies. They pool investments together; as an investor in a fund, you have a proportionate interest in it and receive your earnings in a similar manner. Collective investment funds charge administrative fees and investment management fees.

Guaranteed investment contracts

Guaranteed investment contracts are pools of funds created by banks or insurance companies. Their income is typically fixed. They charge administrative fees and investment management fees.