Some categories of funds tend to have lower expense ratios than others, generally because of the level of active management that’s required. Bond funds often charge fewer basis points than equity funds. Large-cap funds tend to cost less than small-caps, and domestic funds less than international ones. That’s also the case with index funds, which tend to be less expensive than actively managed funds. And if your plan includes funds from different investment companies, you may also find that one company’s charges are lower than another’s for similar investment choices.
In addition, some products, such as variable annuities, may have higher fees across the board. In this case, the charges also cover certain insurance protections. Some products also impose surrender fees for up to seven years and sometimes longer. While those charges don’t reduce your return while you hold the investment, they can result in a substantial loss if you wish to make a change in your portfolio.
Other charges
Trading costs, which are amounts that your 401(k) plan pays a brokerage firm to execute buy and sell orders, are charged separately, so if you change your allocation frequently those expenses may add up. Similarly, if the funds you select have large turnover rates, the fund itself will have substantial trading fees that are debited from all of the plan accounts.
Choosing investment alternatives
If you want to include cost analysis as one of your criteria, consider this route to selecting your 401(k) investments:
1. Determine the asset allocation that’s best suited to reaching your objectives, keeping in mind your timeframe and risk tolerance.
2. Select the asset subclasses you want to include in your portfolio from among those available in the plan to ensure you are well diversified.
3. Compare the choices within each of those subcategories to choose the one that best meets your criteria. Cost is a factor at this stage if your choices are otherwise comparable. But simply choosing the least expensive alternatives as you create your portfolio is unlikely to produce the strongest overall results.
Some categories of funds tend to have lower expense ratios than others, generally because of the level of active management that’s required. Bond funds often charge fewer 