How much are you paying for your 401(k) plan—and are these costs in line with industry averages?
This article reviews averages for expense ratios, recordkeeping fees, investment costs, revenue-sharing fees, and individual transaction fees.
We’ll also show you how to locate plan fees and other costs, so you can better understand what you’re paying.
There’s no such thing as a free lunch—and 401(k) plans are no exception to this maxim. Whether it’s you, your employer, or both, somebody has to cover the costs involved in setting up, managing, reporting on, and meeting compliance requirements for your retirement plan.
Some fees are taken out automatically from your retirement account—like plan administration fees and investment advisory fees—and it’s not always easy to see exactly how much you’re being charged. According to a 2021 report from the Government Accountability Office, almost 40% of Americans don’t fully understand the fees associated with their 401(k) accounts.
Why do 401(k) fees matter?
Let’s assume you have a $100,000 balance and are 30 years away from retirement. Here are three hypothetical investment scenarios in a fund with an annual 6% rate of return and various annual expense ratios:
|Annual 401(k) fee (expense ratio)||Balance After 30 years||Difference from 0% scenario|
In our example, a 0.25% annual expense ratio means you’d pay $250 on a balance of $100,000. An expense ratio—also called a “fund fee”—refers to a fund's annual operating expenses. Fund expenses are expressed as a percentage of the fund's average net assets, and do not come directly out of a participant's retirement account. Instead, expense ratios come from the fund's assets and are reflected in the net asset value.
While expense ratios are an indirect 401(k)-related fee, they can still be significant. For example, $250 per year may not sound like much, but can add up over time. This is why it’s important to understand the expenses of the underlying funds in your 401(k) investments. To help you evaluate the fees from your plan, let’s review nationwide averages for employee fees.
Expense ratios of 401(k) plan investment menus have been decreasing
According to data from the Investment Company Institute (ICI), the annual expense ratios for funds selected for 401(k) plans are decreasing.
Average expense ratio fees for 401(k) participants
|Year||Equity funds||Bond funds||Hybrid funds*|
*Funds investing in a mix of equities and bonds. Data is from the Investment Company Institute, as of April 2021 and is subject to change.
Mutual fund expense ratios have trended downward for more than two decades now, but that doesn’t mean your employer shouldn’t make a case for lower fees. Access to lower costs tends to be correlated with the amount of assets in a plan.
Averages for 401(k) recordkeeping, investment, advisory, 12b-1, and service fees
Knowing the annual expense ratio of your 401(k) is the first step toward understanding the various factors that can affect your nest egg. But it’s just the beginning. Depending on the size of the assets in your plan, the number of plan participants, and the set of applicable plan rules, you may experience direct charges, such as recordkeeping fees, and advisory service charges.
Let’s take a closer look at some of them.
Some 401(k) plans charge an ongoing monthly or annual fee for administering your account. One of those fees is to cover administrative processes and files. According to the 16th Annual NEPC Defined Contribution Plan and Fee Survey from February 2022, average recordkeeping fees range between $45 and $80 per participant.
There’s also a cost associated with the investment vehicles held in a plan. One type of investment vehicle that may be commonly found in a plan is a mutual fund. The investment manager for the mutual fund has costs associated with operating the fund. Rather than charge investors in the mutual fund directly, the investment manager charges its expenses directly to the mutual fund, meaning investors are paying these fees indirectly. These fees are typically listed as a percentage of assets invested in the fund and may include administrative expenses.
On average an account holder in a 401(k) plan with 25 participants and $250,000 in assets could expect their net investment fees to be 0.43% of their plan assets, for a total of $43 (based on a $10,000 average account balance).¹
Investment advisory services refer to the cost of managing the assets of an investment fund, and can be covered on the plan sponsor or plan participant level. Investment advisory services differ based on the investment manager and the nature of the investment product. These fees are generally stated as a percentage of the amount of assets invested in a fund—also called assets under management (AUM)—and are often used to cover administrative expenses. At Human Interest, the maximum annual advisory fees are 0.50%², which include custodial fees.
Revenue sharing fees
Revenue sharing fees are the compensation arrangement between investment managers and retirement plan service providers to compensate the service provider for services it performs related to the investment. For example, a recordkeeper may track ownership of funds for plan participants and, in exchange, receive a portion of these fees otherwise charged to investors. The investment manager essentially shares a portion of the expense (fees) it collected with the service provider.
Revenue sharing fees can vary significantly based on the size of the plan, specifically, the total value of the assets in the plan. More assets tend to give plan administrators leverage to drive down these fees. For example, a plan with 25 participants and $2.5 million in assets averages revenue-sharing fees of 0.72% of a participant’s plan assets.³
A type of revenue sharing fee is a 12b-1 fee. In the 1970s, several mutual funds started to charge fees to account for promotional efforts to attract new investors. However, today, very few funds charge them. According to the ICI Research Perspective report from June 2021, 92% of equity mutual funds did not charge a 12b-1 fee in 2020. Those that do continue to charge a 12b-1 fee are capped at 0.75% by The Securities Exchange Commission (SEC).
Read more about 12b-1 fees here: What is This 12b-1 Fee in My 401(k)?
It’s important for plan fiduciaries to be aware of any revenue sharing compensation paid to a service provider. The fiduciary is obligated to ensure a plan only pays reasonable fees. The fiduciary can only do this if it knows the total compensation the service provider receives, both directly from the plan or plan sponsor and indirectly from revenue sharing from other service providers to the plan.
Individual transaction fees
Trying to meet the needs of their employees, an employer may add certain features to an employer-sponsored 401(k). While some of those features may benefit employees, those add-ons can come with extra charges. Many providers charge fees for specific plan features, which are usually transferred to employees. Plus, service fees may be hidden in 408(b)(2) fee disclosure documents. While some providers charge distribution fees, plan termination fees, and loan initiation fees, Human Interest does not charge additional service fees.
Checklist reviewing your 401(k) fees
Now that you know the average 401(k) costs, here are some things to consider.
1. Review the prospectus of funds in your 401(k)
While some plan sponsors may cover front-end, back-end, and redemption fees, others may opt to pass the bill to plan participants. We believe you should read the full disclosure of fees in the prospectus for any fund you’re considering for your 401(k).
2. Be intentional about the type of fund you are selecting
According to ICI data, the average expense ratio for equity mutual funds offered in the United States in 2021 was 1.13%. However, due to plans offering lower-cost funds, plan participants only paid 0.36% on average. Analyzing active and passive management approaches and the difference in expense ratios associated with each can help you understand which approach is best for you.
Actively managed funds tend to rely on a portfolio management team that deploys various strategies and research to handpick securities for the fund with the goal of outperforming the relevant benchmark. Passive mutual funds are designed to track an index by holding a similar composition of securities as the index. Actively managed funds require additional resources and generally have higher expense ratios than passively managed funds.
3. Help make your 401(k) expenses more predictable
Human Interest offers clear, transparent pricing and access to low-cost funds through an open architecture platform. Through our subsidiary and registered investment adviser, Human Interest Advisors LLC, we can help build your plan investment menu with affordability in mind.
An annual advisory fee of up to 0.50% of the plan’s assets is charged to the plan and allocated to participants’ accounts. This advisory fee includes custodial fees. In addition, participants using Human Interest Advisors’ Model Portfolios tend to see average fund expense ratios of 0.07%.⁴
4. Talk with your employer about reducing plan fees
When was the last a business owner didn’t like the idea of saving money? If you find that the fees from your 401(k) are too high when compared to those of alternative plans, then bring that up through the appropriate channels.
If you want to set up or switch to a 401(k) that we believe is great for employees and employers, let your company know about Human Interest.
Related article: Are my 401(k) fees too high?
Article ByEric Phillips, CFA
Eric Phillips, CFA, has dedicated his career to improving financial wellness. He began his career at Artisan Partners, a global asset management, firm and currently serves as the Senior Director of Financial Partnerships at Human Interest where he works with financial advisors and industry partners to help them offer affordable retirement plans.