Many people have the common misconception that investments are free if held inside of a qualified plan (401k), an annuity, or if they purchase a mutual fund or etc on their own.
Please know there are still costs associated with these, as nothing is ever free. Let’s look at a hypothetical example of a qualified plan (i.e. 401(k)). Let’s assume that you have 15 or 20 choices inside of your 401(k) to help diversify your account further. These holdings are selected by your plan sponsor to be available to you. Each year they are required to send you out a prospectus either digitally or through the mail to explain all of the details regarding that fund. Most plans utilize mutual funds to help further diversify your account. In this example a mutual fund would have 2 underlying layers of expenses that you would not see unless you dig for them. The first is what is called a 12b-1 expense. This is an expense that is built into the Mutual Fund, and is commonly called a marketing expense (this helps cover the marketing materials and prospectuses that you receive). This can typically range in cost from .2% – .5% depending on the company. In addition to this the mutual fund would have an internal expense, an expense charged for managing the underlying investments (a mutual fund will typically have 30-50 investments that are managed by an internal money manage)r, this is also an expense that is built into the holding that you will have to dig to find (this is typically in the .2 -.5% range as well). Add your administrative cost from your plan sponsor on top of this and it is definitely not free