LAST REVIEWED May 02 2020 8 MIN READ
By The Human Interest Team
If you don’t know how much you’re paying for your 401(k) plan or didn’t notice when fee information started showing up on your statement, don’t feel alone. Over half of 401(k) participants don’t know about 401(k) plan fees or understand how much they’re losing in 401(k) fees. It’s estimated that millions of Americans have no idea whether they’re paying fees or how much they’re paying, and they find the task of figuring it out to be confusing and difficult. However, it is good to understand your 401(k) fees, as they could be affecting your retirement savings.
How to Read 401(k) Statements
The Department of Labor introduced a fiduciary rule to help investors like you make educated decisions. This fiduciary rule calls for administrators to disclose 401(k) fees on quarterly statements and show your investments’ rates of return, amounts deducted to cover expenses, and any related fees. The rule also requires 401(k) administrators to act in your best interests, which includes keeping fees low. However, even with this new fiduciary rule, investment professionals say there are 401(k) fees going unrecognized by participants.
One example of a commonly overlooked fee is plan management and service fees, because administrators don’t always send yearly bills. Another example is receiving statements that don’t itemize the individual fees, but instead show the fees in relation to the plan’s reduced net returns. Sometimes your 401(k) statement may use technical terms that aren’t very easy to decipher, such as Expense Ratios, Total Operating Expenses As a Percentage, or Total Asset-Based Fees. However, it’s usually still possible to figure out what the numbers really represent if you know to look for them.
What Are 401(k) Fees?
There are three basic categories of 401(k) fees. According to the U.S. Department of Labor, these three categories are investment fees, plan administration fees, and individual service fees.
401(k) Investment Fees
Investment fees account for the largest portion of 401(K) fees and come from the cost of investment-related services. One such service is investment management, where a professional helps you to define investment goals, achieve your long-term or short-term goals, and develop a portfolio strategy with the best allocation of assets. Investment fees are usually charged as a percentage of assets invested and can be broken down into sales loads, expense ratios, and other additional costs.
These investment fees shouldn’t be overlooked. They are often buried in your statement and seem like a small percentage, so people tend not to notice them, but over time this small amount adds up, making a big dent in your return.
401(k) Individual Service Fees
Individual service fees cover extra features that you choose to opt into. Some of these extra features include a brokerage window, rolling 401(k) investments into an IRA, certain transactions like hardship withdrawals, taking out a 401(k) loan, or using financial advisory services. These fees can range anywhere from $20 to over $150, depending on the reason. Some individual service fees aren’t required to be disclosed, like account setup fees or other indirect fees, but most of your individual fees should be disclosed on your quarterly statements.
401(k) Plan Administration Fees
When you have a financial institution managing your 401(k), there will be administration fees. These administration fees cover general management such as legal and trustee services, record-keeping, and accounting. They also cover the day-to-day operations of the financial institution like customer service representatives, electronic access to plan information, and educational seminars. The plan administration fees are sometimes paid by the employer or deducted from investment returns, but usually, the fees are passed on to you as a flat fee or percentage fee on the total balance.
It’s important to note that sometimes these plan administration fees are not disclosed on your statements when they are paid out of the plan’s funds. At a minimum, you might want to check into the administrative fee line item on your statement and see what it really includes, because it’s probably more than just a small annual fee. Also, since the plan administration fees are paying for services from the financial institution, you might as well make sure you’re getting your money’s worth and take advantage of all the services your financial institution has to offer.
The Bottom Line
Figuring out exactly how many fees and what types of fees you are playing on your 401(k) plan can get complicated, especially when disclosure on your statements can range from a short summary to dozens of pages. You may have to do a little homework and it may be a bit of a pain, but it’s critical to your long-term goals to know exactly how much you’re paying. Start by seeing if you can identify any conversion-related charges, plan administration costs, investment product fees, or service provider charges. The Labor Department provides an example 401(k) plan fee disclosure form along with videos, charts, and other resources that you may find helpful.
You’ll be able to make better retirement savings decisions if you’re well informed about the 401(k) fees that you’re paying. If you think you’re paying too much in fees, you can investigate whether your plan has a low-fee fund option or ask your employer to include more low-cost investment options. If you can’t find an employer-sponsored option that meets your needs, you could consider opening an individual retirement account with lower fees on your own, although, if your employer offers matching donations, you may still be further ahead paying the fees. You’ll need to take full stock of your portfolio and assess your long-term goals before making any big decisions.
Do you have more questions about 401(k) fees or need some help figuring out a low-fee option? There’s an expert at Human Interest who’s ready to speak with you — just contact us. We’d love to help!
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.