Understanding those numbers in your 401(k)

If you've ever had to select investments within a 401(k) plan you've probably run across something like the picture above, but with 20+ more rows of options. It can be hard enough to figure out where to invest and somehow more information doesn't make it easier to decide.

Today we're going to learn about "Net Expense Ratio." You can see this in the second to last column of the picture above. An expense ratio is the annual rate that the specific investment charges the investor (you).

This is how the fund makes money. Think of it as the price you pay to be part of the investment. If you look at this list or even your own list of options, you will notice there is a variety in what they charge, with some being higher and some being lower. If you've ever heard the term "low cost investment" or "low cost fund" this means the expense ratio is low.

Most people can understand that having a lower "expense ratio" means they are being charged less, which means when the investment goes up, they get to keep more of it. And you're right! The tricky thing is....low cost doesn't automatically mean "better." You could choose a low cost investment and it could still be the wrong type of investment for your goals.

The real key is combining low cost with the right investment and then letting the magic happen for the next couple of decades.