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Answers to a question we got this month.
What does a 403(b) plan cost and who is paying for it?
Typically, the plan has two kinds of expenses: administrative costs and investment fees.
Administrative fees are paid to the vendor you are enrolled with for the services necessary for the day-to-day operation of a retirement savings plan. Services may include record keeping, accounting, legal services, website support, customer service and phone support, and ongoing participant communications.
These fees can range from 0.2% on the low end to 3% on the high end. For example, if you had $100 invested, a fee 0.2% would cost you 20 cents a year, while a fee of 3% would cost you $3 a year.
Investment fees are usually charged by the investment company as a percentage of the total assets invested with a fund. These fees are not deducted directly from your account, they are paid indirectly through what is known as an “expense ratio”
An expense ratio is the percentage of assets an investment provider charges each year in exchange for its services. For example, an expense ratio of 1.5% means that each year 1.5% of the fund’s total assets are used to cover expenses. Expenses can vary among investment options due to factors such as the risks and complexities of the fund’s investment strategy.
For example, fees for international stock funds are typically higher than fees for domestic stock funds, and actively managed fund fees are typically higher than passively managed (index) funds. An expense ratio is important to understand because it affects your return. It is deducted from the fund’s assets – total return is “net” of these fees. In other words, return is calculated after these fees have been deducted from the fund.
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