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. This guide was designed to help you navigate the Department of Labor’s model chart format, which most 401(k) providers use, and answer some of the most commonly asked questions about retirement plan fees.
The “average annual total return” is percentage increase or decrease in an investment’s value (i.e., the profit or loss for each fund) averaged over the time periods shown. 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 that lists -2.48% in the 5-year column has had an average decrease of 2.48% 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 (and/or since inception if the fund has not been in existence for any of those time periods). These tables help you compare how each fund has performed historically. But remember, 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. Performance is just one of the factors to consider when evaluating investments.
A benchmark is an index that represents a segment of the stock or bond market. Benchmarks are used as a standard against which to compare fund performance. You may be familiar with the Dow Jones Industrial Average or the S&P 500 index, two well-known indexes. The S&P 500, a common benchmark, is made up of the common stocks of 500 leading U.S. companies and is generally considered representative of the U.S. stock market. A relevant benchmark must be provided in the comparative chart for each investment in your plan’s lineup. Different benchmarks will be listed for different types of investments, so you can compare how funds in a similar category did compared to one standard (the benchmark).
There are costs 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 costs of operating a fund are referred to as the “total annual operating expenses” or “expense ratio.” These costs reduce the average annual total return of the fund. Total annual operating expenses will be listed on the comparative chart for each plan investment. They 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 total annual operating expenses as 1.45%, it means that 1.45 percent of the fund’s assets, or $14.50 per each $1,000 in the fund, will used to cover the expenses of operating the fund.
In addition to the costs of operating a fund, there may also be service charges or fees referred to as “shareholder-type fees” that are charged when you purchase or sell shares. These fees are typically charged directly to your account. For example, a sales charge may be assessed when you initially purchase shares and deducted from the amount you invest. Sales charges may also be assessed when you sell the shares, referred to as a deferred sales charge. Sales charges help cover the cost of commissions paid to the advisor who sold you the fund. Another type of shareholder fee is a redemption fee, which is deducted when shares are sold in a short period of time. A redemption fee is paid to the fund to defray the cost of redeeming the shares and is also designed to discourage frequent trading, since mutual funds are generally considered long-term investments. For example, a fund that charges a 2% redemption fee for sales within two months of purchase would list that in the shareholder-type fee column of the comparative chart. 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.
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