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401k Investment fees

R Rosenstock

I see how to categorize 401k investment fees in a category such as "investment fees" and checking the box "affects investment performance". Doing so seems to calculate the OVERALL ACCOUNT IRR correctly net of the fee. However, Fidelity takes the fees from individual investments in the account, so when you calculate returns by security, it still calculates returns GROSS of fees, not net of fees. Is there any way to correct this?

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Boatnmaniac

The reason why it is done this way is because account management fees are account fees, not individual securities fees. So the performances of the individual securities are not affected by account management fees. It would be a different story if there are transaction fees that are directly associated with the specific securities, such as commissions.

So, I don't recommend trying to make the account management fees applicable to the performance of the individual securities because it is not going to reflect reality nor what I'm pretty sure will be reported to you by the 401(k) plan. But if your heart is set on trying to do this you might want to experiment with the following ideas to see if one or both provide the desired results.

Assuming that Fidelity is generating Sold transactions for each of the securities to obtain the cash needed to cover the account management fees:

You could edit those Sold transactions by entering the entire proceeds of the transactions into the Commission field (and also maybe enter into the Memo field that it is for the account management fee). This will then require you to delete the downloaded transaction for the Management fee. That would certainly cause an impact to the performances of the individual securities but I'm not sure how that might impact the performance of the account.

Another idea, which I am less confident about, would be to manually enter a Miscellaneous Expense transaction corresponding to each security Sold transaction with the date and dollar amount being the same as what is in the Sold transaction. You can enter the specific security that it applies to and you can enter the category and memo for it. Again, you would need to delete the downloaded Management fee transaction. Maybe this will then impact the performance of the individual security but I don't know that for sure so you would experiment with it and see what happens. Again, I do not know how this might impact the account performance.

Maybe someone else will pipe in here with other ideas?

Jim_Harman

The second option should work. You can see the difference by clicking on Show details in the Investment Performance Report.

All comments

Boatnmaniac

Assuming that Fidelity is generating Sold transactions for each of the securities to obtain the cash needed to cover the account management fees:

Maybe someone else will pipe in here with other ideas?

Jim_Harman

The second option should work. You can see the difference by clicking on Show details in the Investment Performance Report.

R Rosenstock

Many thanks for your responses! While the fees are account based, not attributable to individual securities, Fidelity has no choice but to take them proportionately from the account holdings. Better that than from holding cash and the long term performance drag that would have.

q_lurker

Option 2 should be the correct way to go — if it worked properly. It does not. I'll be posting a more extensive proof under the ~~Errors~~… Reports category in a bit. Posted.

I do wonder if it is valuable or meaningful to attribute the Fee to the security as if it reduces the performance of that security. In one account not subject to such a fee, the security performs to a computed level. In a second account subject to such a fee, does the security perform worse because of the fee or does it perform just as well? I'll grant that the investor can get better performance from a security with a proper buy-low / sell-high timing. Still thinking about it.

Boatnmaniac

I still think the management fee should be applied to just the account because that is how it works in the real world. The real world keeps account and securities costs separate from each other because one does not have anything to do with the other. The management fee is an account cost, not a securities cost. I don't know of any brokerage that applies account management fees either directly or indirectly to the securities in that account because that distorts the true performance picture of the securities in that account.

Instead, the securities performance is determined by the Sold transaction prices compared to their Cost Basis (which includes any and all applicable security-specific buying and selling costs like commissions). That defines the performance of the securities, not whatever is done afterward with the cash generated from selling the security.

Another thing to think about when applying non-security related costs to the securities is that it paints a false historical picture of how the security is actually performing and that can lead to making bad investment buy/sell decisions in the future. For example, Security #1 has an actual market performance of 10% but after allocating the management fees to the securities it drops the calculated performance number to 8% so it no longer tracks with the market. Later you find Security #2 that has a market return of 9%. Based upon that you decide to sell Security #1 and buy Security #2 and you are happy because you think you just made a trade that is going to increase your returns by 1% (i.e., replacing an 8% fabricated return security with a 9% market return security). But in reality you just made a trade that is going to decrease your real returns by 1% (i.e., replacing a 10% market return security with a 9% market return security).