Key Takeaways
There are three basic categories of 401(k) fees: investment fees, plan administration fees, and individual service fees.
Fees charged by a 401(k) service provider can be found in the Participant Fee Disclosure, and those charged by a fund can be found in a fund’s prospectus.
We’ll review these fees to help you better understand what you’re paying for your 401(k).
As a plan participant, are you familiar with the breakdown of fees associated with your 401(k) account?
If you don’t know off the top of your head, you’re not alone. A 2021 report from the U.S. Government Accountability Office found that 40% of participants don't understand 401(k) fee information and 41% don't know they pay fees.
Understanding your 401(k) fees can help you understand how they’re affecting retirement savings. These fees, generally covering investments, plan administration, or individual services, are detailed in disclosures and fund prospectuses. Let's break down each fee, so you can better understand what you're paying for your retirement savings.
How much can fees affect my retirement savings?
To set the stage, the average investment expense of plan assets is 1.37% (for plans with 25 participants and $250,000 in total assets).¹ While this may not seem like much, investment expenses can eat away at your retirement savings and may mean you have to work longer.
An extra 1% in fees can be significant when it compounds over time. Let’s consider a situation where a 25-year-old expects to retire at 65, has $25,000 in retirement savings, saves $10,000 in their 401(k) account each year, and averages a 7% annual return. In this scenario, paying just 1% in fees could cost the saver more than $590,000 over 40 years of saving.
Three different types of 401(k) fees
According to the U.S. Department of Labor, there are three basic categories of 401(k) fees:
Investment fees
Plan administration (service provider) fees
Individual service fees
Let’s break down the typical fees in each category.
1. Investment fees
Investment fees are the costs associated with managing the funds in which your 401(k) contributions are invested. These fees are captured primarily through the fund's expense ratio, which is an annual fee expressed as a percentage of your assets in the fund. They cover services like portfolio management, trading costs, and shareholder services. Actively managed funds typically have higher expense ratios than passively managed funds, like index funds, due to the extensive research and active trading involved.
These fees can significantly impact your net returns over time, so it's crucial to consider them when choosing your investments. Because they’re deducted directly from your investment returns, you won’t see investment fees as direct charges against your account balance.
Here are some typical investment fees:
Expense ratios: Expense ratios cover the ongoing costs of managing a mutual fund or ETF. They are expressed as a percentage of the fund's average net assets and include administrative, management, and operating expenses. The fees are deducted from the fund’s earnings, so participants typically don't see this charge directly, but it impacts the investment's net returns.
Management fees: These are fees paid to the investment managers who oversee the portfolio. They are often included as part of the expense ratio and serve to compensate the fund managers for their expertise and day-to-day decision-making in selecting the fund's investments.
12b-1 fees: These fees are part of the expense ratio and cover the fund's marketing and distribution expenses. They can also compensate brokers for selling the fund. Some funds with 12b-1 fees include them in their annual operating expenses, and these fees can vary among funds.
Sales loads: Sales loads are commissions paid when buying or selling mutual funds. They can be front-end loads, which are paid when buying into the fund, or back-end loads, which are paid when selling the fund, often decreasing the longer the fund is held. No-load funds do not charge these commissions.
Trading and transaction fees: A transaction or trading fee might apply to every investment transaction, such as buying or selling stocks, bonds, or ETFs. These fees can vary depending on the brokerage firm and are usually charged per transaction.
Understanding these fees can help you assess how they affect your investment's overall performance and help you make more informed choices about where to invest your retirement savings. These fees, though potentially small on each transaction, can add up over time, significantly impacting long-term returns.
2. Plan administrative fees
Plan sponsors typically hire a service provider to handle the plan’s administrative requirements. These service providers charge fees for their services, which may be billed directly to the sponsor or charged to the plan. When service provider fees are charged to the plan, they are then allocated among individual accounts in proportion to their account balances or as a flat fee.
3. Individual service fees
Individual service fees cover extra plan features that you choose to use. Individual fees should be disclosed on your quarterly statements. These fees can range anywhere from $20 to over $150, depending on the type and include situations such as:
Withdrawing funds: Most account owners eventually withdraw funds from their retirement plans. 401(k) service providers may charge a fee per distribution to cover the processing expenses they incur when liquidating and sending funds to participants.
Taking out a loan: 401(k) service providers may charge a loan issuance fee and an annual maintenance fee.
Dealing with a divorce: Dividing up assets during a divorce may involve 401(k) plans. Qualified domestic relations order (QDRO) is the process of splitting retirement accounts due to a divorce settlement. 401(k) service providers may charge to review and process a QDRO in addition to distribution fees once funds are disbursed to the alternate payee.
How do I find out my 401(k) fees?
401(k) fees are listed in different places, depending on who’s charging them. Here's how you can locate these important details:
404(a)(5) participant fee disclosure: The first step is to review the 404(a)(5) fee disclosure notice that your plan must provide. This document breaks down all fees associated with your 401(k), including expense ratios for each fund in your plan. Your employer is required to provide this fee disclosure when you first enroll in the plan and annually thereafter.
Fund prospectuses: Every mutual fund or ETF includes a prospectus, which contains detailed information about the investment, including its expense ratio. If you're considering whether a particular fund is right for you, the prospectus is a good resource to explore. Prospectuses can typically be accessed through your 401(k) provider's website, where each fund is listed with downloadable documents.
Online platforms/401(k) provider portals: Most 401(k) plans offer an online portal where you can view detailed information about your account, including options for different funds. By logging into your account on your provider's website, you can find expense ratios listed alongside each available fund within the plan. This section often provides quick summaries of each fund's key statistics, including past performance and current fees.
Financial news websites and online tools: You can use online financial platforms and tools like Morningstar or Yahoo Finance to quickly search for a fund by its name or symbol to find up-to-date information about its expense ratio. These resources often provide deeper insight into any historical changes in a fund's fees and additional comparison tools for investors.
Requesting information from a plan administrator: If you're having trouble locating the information on your own, you can contact your plan administrator for assistance. They should be able to provide you with the fee details or direct you to where you can find this information online.
Using these methods will help you better understand your investment options and their associated costs, ultimately enabling you to make informed decisions about your 401(k) investments.
Being proactive: How to stay informed about 401(k) fees
Figuring out exactly how many fees and what types of fees you are paying for your 401(k) plan can get complicated, especially when disclosures can range from a short summary to dozens of pages. You may have to do a little homework—and it may require some time—but it’s critical to your long-term goals to know exactly how much you’re paying.
Tip: Start by seeing if you can identify any plan administration costs, investment product fees, or service provider charges. The DOL provides some useful examples of 401(k) plan fee disclosure forms, along with videos, charts, and other resources that you may find helpful.
Hopefully, you’ll be able to make better retirement savings decisions if you’re well-informed about the 401(k) fees you’re paying.
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Article By
Wendy Baker, J.D.Wendy Baker is Senior Legal Counsel at Human Interest, bringing over 25 years of experience exclusively in the ERISA space, spanning defined contribution plan recordkeeping and administration. She has a J.D. from Case Western Reserve University, is a member of the North Carolina and Ohio Bars, the American Bar Association, and industry groups.
