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Learning how to grow your 401(k) wisely

Thanks to new disclosure requirements, avoiding costly fees is easier

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Are you paying too much in 401(k) fees? Until recently, it was difficult to know. But Consumer Reports notes that as of last year, 401(k) plan sponsors are required to send participants annual disclosures outlining fund fees and their effects on savings over time. They include:

Investment management fees. These are the largest component of 401(k) fees for individual funds. They’re ongoing charges to manage the funds in your account. Also known as investment advisory or account maintenance fees, they’re generally stated as a percentage of assets, or expense ratio. A 12b-1 fee pays the fund’s costs to market itself. Other administrative fees cover maintenance of customer-service numbers, and accounting and other services.

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Plan administration fees. These include record keeping, accounting, legal services, and other costs to run your 401(k). They also include the costs of maintaining, for example, a plan website, telephone voice response systems, and investment education.

Insurance fees. If you own a variable annuity contract within your account, you might also pay a “mortality risk” fee to cover the insurer if you die earlier than anticipated. You’ll also pay surrender and transfer charges if you withdraw investments prematurely. Those are included in the expense ratio.

Individual fees. They might include what you pay for individual services, such as taking out a loan and obtaining documents in a divorce proceeding.

What you can do

Consumer Reports suggests these ways to make the best of a bad hand and build the retirement fund you’ll need:

Take the free money and run. Invest the minimum needed for the full company match (often 6 percent of your gross income, for a 3 percent match). Put other savings in a Roth or a traditional IRA composed of low-cost funds. At 59½, you might also be able to use what’s known as an in-service, nonhardship withdrawal from your current employer’s 401(k). You roll over balances into an IRA with more choices; you still defer taxes while avoiding an early-withdrawal penalty.

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Diversify but simplify. Consider a target-date fund composed of low-cost index funds or a simple lineup of four funds — a large-cap equity, a small-cap equity, a bond, and an international — offering the lowest expenses compared with comparable portfolios. Target-date funds, sometimes called life-cycle funds, are actually collections, or “funds of funds.” They give diversification and will rebalance, or reallocate, your holdings automatically.

Avoid too much company stock. If your plan match is in company stock, rebalance regularly to shift those shares to 5 to 10 percent of the total; it’s unwise to depend on the same company for your investment gains and your livelihood.

Up your ante. Most people younger than 40 should have a combined contribution — what’s taken from their pay plus what the employer provides — of at least 10 percent of their income. If you’re older than 40 and behind on your savings goal, put away at least 15 percent. The maximum allowable 401(k) contribution for 2013 is $17,500; for those 50 and older, it’s $23,000.

Consumer Reports writes columns, reviews, and ratings on cars, appliances, electronics, and other consumer goods. Previous stories can be found at consumerreports.org.

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