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A 401(k) is a defined contribution plan. You put away a set amount each paycheck, your employer may match some percentage of the contribution, and years later, you declare your own financial independence. There are other retirement-saving vehicles, such as an IRA, that can help you get there, as well.
Even if you know how a 401(k) works and enthusiastically contribute to one, do you know about the fees that can come with it and the financial implications that come with them?
Key Takeaways
- 401(k) plans come with various fees that aren’t always evident to the investor but can greatly impact an account’s return over the long term.
- Typically ranging from 0.5% to 2%, 401(k) plan fees can vary greatly, depending on the size of your employer’s 401(k) plan, the number of participants, and the plan provider.
- Reflecting mostly administrative and investment management costs, 401(k) fees spring from two sources: the plan provider and the individual funds within the plan.
- Although individual investors can’t do much about plan provider fees, they can choose funds within the plan with lower expense ratios.
Finding the Fees in 401(k)s
In September 2024, the U.S. Government Accountability Office released a report on the impacts of fee disclosure regulations. As part of that report, it revealed findings from a study done a few years prior. That GAO study found that 40% of participants did not fully understand fee information, and 41% of survey participants did not know they paid fees.
The reality is that your provider takes a fee every month, and over time, these fees impact your returns. The U.S. Department of Labor does require 401(k) providers to disclose all fees in a prospectus that you receive when you enroll in a plan. It must be updated every year.
It pays to pay attention to these fees. When you receive a 401(k) statement or prospectus, check for line items or categories such as Total Asset-Based Fees, Total Operating Expenses As a %, and Expense Ratios.
Key 401(k) Plan Fees
Finding the fees is one thing. Understanding them is another. The most firmly entrenched of the fees is the 12b-1 fee, named after the relevant section of the Investment Company Act of 1940. Generally filed under marketing and distribution expenses, 12b-1 fees are ostensibly earmarked for the intermediaries who sell 401(k) plans to your employer. These fees are capped at 0.75% of assets, while some funds impose a 0.25% shareholder services fee.
Note that 12b-1 fees charged by individual funds are separate from investment management fees, which are the cut the 401(k) provider takes for itself.
Important
401(k) fees fall into two basic categories: those charged by the plan provider, and those charged by the mutual funds or exchange-traded funds (ETFs) in the account.
Breaking Down 401(k) Plan Fees
401(k) plan fees typically fall into four categories:
- Investment
- Administrative
- Individual service
- Custodial
Here’s a sample quarterly summary from a third-party firm that administers plans and keeps records. The figures, which represent dollar amounts, are on a total contribution of $3,207.70 for the quarter.
| Expenses | |
| Administrative Fees | $25.00 |
| Investment Fees | $4.35 |
| Asset/Revenue Sharing | $2.31 |
| Audit, Fiduciary & Consulting | $13.25 |
| TOTAL | $44.91 |
This means the investor is paying $44.91 in fees on a principal of $3,207.70. (That’s 1.4%.)
The Impact of 401(k) Fees
401(k) plan fees can vary greatly, depending on the size of your employer’s 401(k) plan, the number of participants, and the plan provider. The good news is that the average 401(k) plan fee has historically decreased primarily due to increased adoption of low-cost mutual funds and index funds.
According to the Investment Company Institute, at the end of 2023, the average asset-weighted expense ratio for equity mutual funds held in 401(k) plans was 0.31%. Target-date mutual funds averaged 0.30%. These figures reflect only the investment management fees, which are the largest component of 401(k) costs for most participants. There may also be additional administrative and recordkeeping fixed fees charged quarterly or annually.
To illustrate how fees can impact retirement savings, consider a scenario where an individual invests $100,000 in a 401(k) plan that earns an average annual return of 7% before fees. If the plan charges a 0.5% annual fee, the net return drops to 6.5%. Over 35 years, the account would grow to approximately $911,000 with the fee.
If the 401(k) plan had no fees, that $100k investment would grow to about $1,068,000. In other words, the 401(k) fee of 0.5% would cause an ending portfolio balance difference of $157,000. This example shows how even the smallest fees over time can significantly reduce the compounding growth of retirement savings over time.
1%
The annual fee charged by the average 401(k) fund, according to the Center for American Progress.
What to Do About 401(K) Fees
Short of boycotting the 401(k), there’s not much you can do about fees charged by the plan provider or administrator—although if you discover they’re egregious (say 2% or higher), you could raise the issue with your human resources department. The marketplace is incredibly competitive. If one provider’s fees are too much, there are plenty of alternatives.
You can also take some action on charges for individual funds within a 401(k) plan. Look in each fund’s prospectus for the listed expense ratio, which is the sum of fees expressed as an annualized percentage. If you have a choice between two similar funds—two growth-stock funds, for example—consider prioritizing the one with the lower expense ratio.
In general, equity funds tend to be more expensive than bond funds, while exchange-traded funds (ETFs) are cheaper than mutual funds. Still, don’t compromise your investment goals, risk tolerance, or common sense just to score a lower fee.
What Are Normal 401(k) Fees?
401(k) fees can range between 0.5% and 2% or even higher, based on the size of an employer’s 401(k) plan, how many people are participating in the plan, and which provider is offering the plan. The average annual fee charged by most funds is 1%, according to the Center for American Progress.
How Can I Avoid 401(k) Fees?
401(k) fees are charged by both the plan provider and the funds within the plan and therefore can’t be entirely avoided. Plan provider fees are static, but investors can avoid higher fees by picking funds within the plan that have the lowest expense ratios.
How Can I Find Hidden 401(k) Fees?
The fees aren’t actually hidden, but are in fact disclosed in the prospectus that is given to new investors when they enroll in a plan. This prospectus is updated yearly, reflecting any change in fees. Disclosing fees is not optional, and is a requirement of the U.S. Department of Labor. To check fees, look through your 401(k) statement or prospectus for line items such as Total Asset-Based Fees, Total Operating Expenses As a %, and Expense Ratios.
The Bottom Line
Fees should be but one criterion in choosing a 401(k) investment. The most important factor should be overall return. Look at asset class and the fund manager’s competence and track record first. These areas should have a greater impact on long-term returns than fees. And don’t forget to consider whether you are more comfortable with an index fund or an actively managed fund.
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