What’s in your 401(k) plan?

Published 10:20 pm Thursday, January 2, 2014

By Arie Korving

Have you seen the commercial for a credit card showing rampaging Vikings with the tag line “what’s in your wallet? Credit cards can be confusing. The same can be true of your 401(k) plan. Does it feel like Vikings put your company’s plan together?

The biggest problem with 401(k) plans is they are written in jargon that investment professionals understand, but the typical investor does not. Following is some guidance we hope will help.

Email newsletter signup

The cost of 401(k) plans has been in the news recently, because it affects how much you make. You should know how much you are paying for your plan.

A 401(k) plan has two different costs associated with it.

4An administrative fee can help cover the cost of a record keeper who tracks where contributions are going and runs tests required by the IRS to make sure the fund complies with government regulations.

4The expense of running the mutual fund, usually referred to as the “expense ratio,” is the fee charged by the mutual fund company to manage the fund. It can range from low (less than 0.1 percent for some index funds) to more than 2 percent for some foreign funds. The amount is found in the fund prospectus. A fund worth $10,000 with a 1-percent expense ratio will cost the investor $100 per year in fees. You will not see this as a separate deduction but it will reduce the fund performance by the amount of the fee.

A typical plan offers a wide selection of mutual funds to choose from. The terms that are used are often confusing to the layman. Follwing is a brief explanation:

  • Growth Fund: A stock mutual fund that invests in rapidly growing companies like Apple, Google, Microsoft and similar companies that are believed to grow more rapidly than the economy as a whole
  • Value Fund: A stock mutual fund that primarily holds stocks deemed to be undervalued in price and that are likely to pay dividends
  • Blend Fund: A stock mutual fund with portfolios consisting of a mix of value and growth stocks.
  • Balanced Fund: A fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio.
  • Index Fund: A fund that tries to provide the return of an index, like the Standard & Poor’s 500 stock index, minus the fund fees. Index funds generally offer low fees, because there is no one actively selecting the securities in the fund.
  • Bond Fund: A fund invested primarily in bonds and other debt instruments. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities.
  • Foreign Fund: A mutual fund that invests in companies or government securities located outside the investor’s country of residence. Foreign funds can invest in stocks, bonds, currencies, real estate or other securities in foreign countries.

How do I know what’s right for me?

That’s the big question. To answer your questions about you investment options you can obtain copies of the fund prospectuses, which are available either o-line or by calling the fund companies and asking for them to be mailed to you. Study these carefully to understand how the fund operates and what its expenses are.

Second, you should determine how much risk you are willing to take. Keep in mind, there are no guarantees with mutual funds, and they will fluctuate in value. You should also consider where you believe the economy is going, what the direction of interest rates will be and how government policies will affect the markets.

Third, you should determine how much money you can set aside for retirement and how much you would like to have when you are ready to retire. Keep in mind, there can be a penalty for withdrawing money from a 401(k) before you are 59-½, and you may be charged a fee for borrowing from a 401(k). Plan to leave the 401(k) alone to grow until you retire.

Keep in mind that how well you are able to retire depends largely on you and how well you are able to save for that day.

Arie Korving is a lifelong financial adviser and the founding principal of Korving & Co., Suffolk. Visit his website at www.korvingco.com or call 757-638-5494.