A 401(k) is an excellent tool to save for your retirement. Financial advisors often encourage you to sign up, especially if your company has any type of matching offer. These instruments do have some fees involved that you need to consider, including basis point fees.
Understanding BPS 401(k)
The basis point fee, or BPS, is used to cover the expenses of managing the retirement account. It is similar to an expense ratio on a mutual fund. It is typically stated in terms of basis points. A basis point is 1/100th of one percent of the value of your 401(k). This does not sound like much, but it can add up over the lifetime of the account.
Retirement plan managers determine the basis points by adding up the total expenses for the year and then they determine the percentage of expenses of the net assets. Let’s say a fund manager has $1 billion under management with costs to manage the account of $5 million; the expense ratio is 0.50 percent. This equates to 50 basis points.
Each shareholder in the account will have to pay a portion of these expenses. The amount each investor must pay is based on how much they have invested. It works the same for almost any type of retirement account. The means that as your retirement plan grows, your fees increase proportionately.
Basis Point Fee Calculator
The next thing you will want to know is how much you owe now and how much you will owe when you approach retirement age. The first thing you need to do is to ask your human resources manager the basis points for your 401(k) plan. You need to know the basis points for each type of investment category.
For example, if you have $50,000 in your 401(k) with $20,000 in stocks and $30,000 in a mutual fund, each of them might have a different basis point fees. Let’s say the stock charges 75 basis points, and the mutual fund charges 50 basis points.
You must divide the amount invested in each fund by 10,000, and then multiply it by the basis points.
(20,000 / 10000) x 75 = $150
(30000 / 10000) x 50 = $150
Next, you must add these together to see the total you are paying each year in fees. In this case, you are paying $300 annually. This still does not sound like much, but if your account grows to $500,000, your fees will be $3,000 per year. These fees are taken out every year and reduce the impact of your contributions, and they can reduce the amount that you have available by as much as tens or even hundreds of thousands of dollars.
Basis point fees are taken out annually most of the time, but some fund managers break them up into quarters or by the month. This way you do not see the big impact that they have over the long haul. If you are fortunate and your company offers several different 401(k) plans to choose from, you need to consider the basis point fees when signing up.
Considerations for BPS
Many companies only offer one 401(k) plan. When you are making your contributions and planning for retirement, you need to consider the negative effect of these fees on your investment account over time. Most importantly, make sure the basis points do not outpace the interest or percentage growth that you earn.
It is important to remember that any money that is taken out of your account to pay for fees is not there to grow in the future. This means that you might have to make substantially more contributions to your account to make sure you have enough to fund the lifestyle you wish to have in the future. The amounts sound small, but they can have a big impact on how you get to spend your retirement years. By understanding BPS 401(k) considerations, you can maximize your 401(k).
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.