Now that the dust has settled after the New Year, a topic on everyone's mind is what will happen to tax rates in 2013 and beyond. It's not certain what the final numbers will be, but most experts agree that we are likely to see tax hikes across the board including income tax, capital gains tax, and taxes on dividends.
And with these tax increases, most people will continue to pay fees on 401(k) retirement plans that are needlessly high. Thus delivering a 1-2 punch to personal retirement income and making it more difficult for your employees to meet their retirement goals.
The tax rate is not something we as either individuals or business owners can change.
However, retirement plan fees are within your control. Knowing what fees are paying for, and who is responsible for paying such costs should be taken into consideration when analyzing and comparing retirement plans and investment options.
There are 3 common types of Fees Associated with Retirement Plans:
1. Plan Administration Fees - These types of fees cover the administrative tasks of the account and plan. Such activities include recordkeeping, safekeeping, investment counseling and services to plan sponsors and participants. This fee can be paid by the plan sponsor or may be passed along to a participant as well.
2. Investment Fees - Fees cover the cost of managing a fund and related expenses. These fees are usually charged as a percentage of total assets held. Included in investment fees is the 12(b)-1 fee, a marketing fee often used to offset the cost of other services.
3. Individual Service Fees - The third type of fee is often paid by the plan participant. This fee covers redemption costs, brokerage or mutual fund window fee, advice related fees and can also cover distribution fees and service fees on participant loans.
How High is Too High?
At the end of the day it depends on a number of factors, but as a "general" rule fees shouldn't exceed 2.5%. Some start-up plans with unique features can blast past that number... no doubt. In my professional opinion, anything above 2% is high and excessive for total plan fees.
With the impending tax increases, can you afford to continue paying high retirement plan fees? Don't "give away" more of your money than you have to. You're going to get hit with higher taxes, but with a savvy financial planning consultant in your corner you can avoid the sucker punch of excessively high fees.