The Investor’s Guide to Navigating 401(k) Fees

By Pam O’Brien · November 26, 2023 · 7 minute read

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The Investor’s Guide to Navigating 401(k) Fees

Approximately 60 million Americans have 401(k) plans through their employer. But many of them aren’t aware of the fees these plans charge. In fact, the majority of investors have no idea how much they’re paying in 401(k) fees, according to a 2022 survey.

Learning about these fees is important because 401(k) fees can add up to tens of thousands of dollars over time and cut into your retirement savings. That’s why you’ll want to find out what these fees consist of and how much they are.

Read on to learn more about 401(k) fees and the steps you may be able to take to help reduce them.

Understanding the Basics of 401(k) Fees

401(k) fees are charged by the provider of your 401(k) plan and the investment funds within the plan. There are three main types of 401(k) fees: investment fees, administrative fees, and service fees. Here’s what these fees cover.

Investment fees: Sometimes also referred to as the expense ratio, investment fees cover an investment’s operating and management costs. These fees are deducted from the investment’s performance and are generally expressed as a percentage.

Administrative fees: These are used to cover the management of your account, including record keeping, accounting, and customer service, among other things. They may be a flat fee or a percentage of the account’s total balance.

Service fees: These fees cover additional services related to your 401(k), such as taking out a 401(k) loan or using financial advisory services. You are only charged these fees if you use the services.

The Impact of Fees on Your Retirement Savings

According to the Investment Company Institute, the average 401(k) participant is in a plan with fees of 0.55%. That means the fees on the average 401(k) account balance of $141,542 would be approximately $778 a year. Over 20 years, that would add up to $15,560 in fees. Over 30 years, fees would total $23,340.

As you can see, this could significantly reduce your retirement savings. And, of course, the greater your account balance, the more fees you would pay.

The types of investments you make will also affect the fees you pay. For instance investments that are actively traded tend to have higher fees, while those that are passively traded typically have lower fees.

How to Interpret Fees on Your 401(k) Statement

Fees are included in your 401(k) statement or prospectus, as required by the U.S. Department of Labor. They may be listed as “Total Asset Based Fees,” “Total Operating Expenses,” or “Expense Ratios.”

Fees should be listed for each investment in your plan. For instance, if a fund had 1.25% of Total Operating Expenses, that means 1.25% of the fund’s assets are used to cover the fund’s operating expenses. So for every $1,000 invested in that fund, the operating expense fees are $12.50.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

How Your 401(k) Fees Stack Up

Once you find the fees in your 401(k) plan, you can determine how they compare to standard 401(k) fees. Here’s a look at what 401(k) fees generally are.

What Are Typical 401(k) Fees?

401(k) fees are based on such factors as the size of the plan, the number of employees in the plan, and the provider offering the plan. These fees can run anywhere from 0.5% to 2%. As mentioned earlier, the average 401(k) participant’s plan fees are approximately 0.55%.

The Significance of Expense Ratios and Industry Averages

You may hear the term “expense ratio” and wonder what it is. An expense ratio is how much you’ll pay over the course of a year to own a particular investment fund such as a mutual fund or an exchange-traded fund (ETF). This fee typically covers the cost of operating and managing the fund. In 2022, the average expense ratio for actively managed mutual funds was 0.66%.

Practical Ways to Minimize 401(k) Fees

While you can’t avoid 401(k) fees, there are some actions you can take to reduce their impact on your retirement savings.

Identifying and Reducing Excess Fees

The fee charged by the plan’s provider is a set fee, however, you may be able to lower the investment fees you pay. To do that, review the expense ratios for the different investment funds in the plan. Then, if it makes sense with your overall investment strategy, pick funds within the plan that have lower expense ratios and avoid funds with higher fees.

In addition, if you think the 401(k) fees charged by your plan are too high in general, speak to your human resources department and ask if they would consider switching to another 401(k) plan with lower fees. This may not be possible, but it doesn’t hurt to ask.

Addressing Hidden Fees in Your 401(k)

The fees in your 401(k) aren’t technically hidden. But they do go by names you may not be familiar with. Here’s how to spot them.

Tools for Uncovering Hidden Fees

The best way to find the fees in your 401(k) is to carefully read through your plan’s prospectus. You now know to look for investment fees or expense ratios, administration fees, and service fees. In addition, look for “12-b1” fees. You may find them fees listed under marketing and distribution. These fees are for the agent or broker who sold the 401(k) plan to your employer. 12-b1 fees are capped at 0.75% of a fund’s assets annually.

Understanding Revenue Sharing and Its Implications

Revenue sharing means adding non-investment fees to a fund’s operating expenses. A 12-b1 fee is one example of this. Revenue sharing fees typically pay for things like record keeping.

Not every 401(k) plan uses revenue sharing, and not all investment funds use them either. Revenue sharing tends to be more likely for actively managed funds rather than passively managed funds like index funds.

That means if you have more actively managed funds, you could be paying more than a colleague who has index funds.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

How Fees Affect Your Retirement Savings Over the Long-Term

401(k) fees can add up over the years, substantially reducing your retirement savings. And one percentage point in the amount of fees you pay can make a big difference.

Case Studies: The Cumulative Effect of Fees Over Time

Let’s say two individuals work for different companies with different 401(k) plans. Person A has a 401(k) that charges 0.50% in fees, and Person B has a plan that charges 1% in fees. If they each invest $100,000 over 20 years with a 4% annual return, 401(k) fees would reduce the value of Person A’s retirement savings by $10,000, while Person B’s retirement savings would be reduced by almost $30,000.

Proactive Measures to Safeguard Your Retirement Funds

In order to minimize the impact of fees on your retirement savings, find out what fees your 401(k) charges. Also, look at the expense ratios for each fund in the plan and choose funds with lower expenses if you can.

In addition, if you leave your job and move to a new employer, you may pay additional 401(k) fees if you keep your old plan with your former employer. And if you’ve changed jobs multiple times and left your 401(k)s with your former employers, then you could be paying 401(k) fees on multiple accounts.

Fortunately, there are steps you can take to avoid these 401(k) fees. You aren’t required to keep your account with your former employer, and you won’t be forced to liquidate it. Instead you could roll over your 401k into your new 401k plan with your new employer, or roll it over into an IRA managed by you.

The benefit of setting up a separate account is that the next time you change jobs, you will automatically have somewhere to rollover your 401(k). With your money in one place, you can more easily see whether you are on track to reach your retirement goals.

The Takeaway

401(k) fees could potentially cost you tens of thousands of dollars or more and substantially reduce your retirement savings. If you have a 401(k), it’s important to learn about the fees charged by your plan. Read over your statements and the plan’s prospectus to find out what and how much these fees are. If possible, choose investment fund options with lower fees to help save money.

And when you leave a job, rather than letting the 401(k) sit with your former employer, consider rolling it over to your new employer’s 401(k) or into a traditional or Roth IRA. One advantage of an IRA is that you will likely have more investment options to choose from and more control of your retirement funds.

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