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Chapter 7. Keeping Tabs on Your Account > Punching Out for the Last Time - Pg. 79

Keeping Tabs on Your Account 79 Usually a plan administration charge reduces investment earnings by a specified number of "basis points," typically anywhere from 5 to 50 basis points per year. A "basis point" is one-hundredth of 1 percent (e.g., 50 bp = .0050). So, every 1 percent of an annual rate of return represents 100 basis points. Let's look at an example. Suppose the published rate of return on a mutual fund for a quarter is 3 percent, your account is worth $10,000, and the plan sponsor charges 5 basis points each quarter to help cover the admin- istrative costs. To keep this example simple, let's assume that there are no new contributions to the account. Here's how the record keeper would credit your investment earnings: · Gross investment return = 3 percent or .03 × $10,000 = $300 · Administrative charge = 5 bp or .0005 × $10,000 = $5 · Net investment return = $300 ­ $5 = $295 To make this math easier to understand, the above example does not take into account other ac- counting practices that can cause differences between the credited and published rates of return. But now that you understand what's going on with your money, let's talk about these complications. There is a lot of activity going on in every individual's 401(k). Think about it for a moment. Every pay period you have contributions being added to your account. You may also be repaying a loan or taking a loan or withdrawal. Finally, the record keeper might post new contributions to your account a few days or even a few weeks after your employer has deducted them from your paycheck. What all this means is that you are buying and selling shares at different times and at different prices throughout the year. For these reasons, it's almost 100 percent certain that the total return you get on your account will differ from the return you read in the newspaper or magazine. Other reasons depend on the valuation method that the record keeper uses, so you'll need to know if the record keeper uses daily or traditional account valuations. (See Chapter 2.)