Why Paying Attention to Your 401(k) Fees Can Save You Over Time

Investing money in a 401(k) plan is a popular way to save money for retirement, but it’s not free. You’ll be charged several different types of fees in a 401(k) plan, and these fees impact your investment over time. Being aware of these fees is the first step to making your 401(k) plan more profitable.

Types of Fees in 401(k) Plans

“There are a variety of fees, including recordkeeping, administration, investment, and financial advice. There might also be transaction-specific fees, (for example) if you take a loan from the plan,”
says Justin Pritchard, a certified financial planner at Approach Financial Planning.

Depending on your 401(k) plan, you may not pay the full costs of each of these fees.

“Employers often pay some or all of the recordkeeping and administration costs. For people in large plans, they might only see investment-related costs. Investment costs are often in the form of a mutual fund’s expense ratio,” Pritchard says. “Financial advice fees might go to an advisor who helps with the plan, or they might cover optional investment management services within the plan.”

Costs of 401(k) Fees

Larger 401(k) plans often have lower fees. In contrast, smaller companies may have pricier 401(k) plans.

“The fees vary widely. Typically, larger plans tend to have the lowest fees. Think of large companies, universities, and hospital systems. A small company or nonprofit might have significantly higher fees. However, small companies can certainly get inexpensive plans,” Pritchard says.”

How much are the fees?

According to BrightScope, in 2022, the average total cost for 401(k) plans was 0.85%. And the average 401(k) plan participant had to pay a total 401(k) plan cost of 0.52%.

Some small plans have costs much higher than the average fee. According to the “401k Averages Book,” a small plan with 50 participants and $500,000 in assets had total plan costs of 2.31%.

Investment fees also vary within a 401(k) plan.

“For investment costs, index funds might cost less than 0.10%, while other active investments might cost more than one percent,” Pritchard says.

Where to Find 401(k) Fees

You can find your 401(k) plan’s fees in several locations.

“One step is to look at your transactions and see if there are any deductions for fees. You should also have a Participant Fee Disclosure document, also known as 404(a)(5), which is supposed to detail the fees in your plan. Look for that when logged in to your account, or ask your plan representative for a copy,” Pritchard says.

It might be difficult to read.

“Unfortunately, those documents don’t always explain things clearly, and they might not show all of the recordkeeping and administration fees you’re paying. However, they often have information about investment expenses,” Pritchard says.

How Lower 401(k) Fees Impact Your Investment

Over 20 years, you could save significant money with a 401(k) plan by lowering the plan’s fees.

“If you contribute $10,000 annually to your 401(k) for 20 years, a 0.5% fee reduction would save you approximately $10,000 over that period, assuming a consistent average annual rate of return,” says Michael Murray, president of Peabody Wealth Advisors.

So, choose the investments in your 401(k) plan wisely. You can expect to pay higher 401(k) fees on managed mutual funds and annuities.

“Typically, the higher fees are on actively managed mutual funds, especially areas where research is more expensive–emerging markets, international, and sector funds,” Murray says. “A recent addition to some 401(k) plans is annuities, which carry significantly higher fees because of the transfer of investment risk from the participants to the insurance company.”

Choosing lower-cost investments will help to lower fees.

“Participants often have choices of low-cost index funds for passive mutual funds and/or lower-cost retirement share classes for active mutual funds,” Murray says.

Just make sure a lower-cost investment in a 401(k) plan also meets your long-term financial goals.

“While it is possible to select less expensive investments, such as index funds, you need to choose investments that are in line with your needs and strategy. Choosing based on cost alone could lead you to have less-than-optimal exposure. For example, if you put everything in a stable value fund because it appears to have no fees, is that the right long-term strategy?” Pritchard asks.

If you are unhappy with the number of lower-cost investments in your 401(k) plan, request more.

“They can always speak with the plan sponsor (for) smaller companies or benefits/HR (for) large companies to see if they would consider adding lower-cost alternatives,” Murray says.

If a plan sponsor or HR rep won’t budge, make the most of the pricey 401(k) plan that you have. At the very least, invest enough to get an employer’s free matching contribution.

“You might contribute just enough to get the match, and then look at IRAs for additional savings,” Pritchard says.

The Bottom Line

If you have money in a 401(k) plan, you must discover the costs of the fees you are paying. Check out your plan’s Participant Fee Disclosure. Ask your 401(k) plan representative if you don’t know where to find it. One way to lower 401(k) fees is to choose low-cost investments such as index funds for your investments.

Actively managed mutual funds come with higher costs, as do annuities. So, carefully consider the costs of the investments that you choose. But don’t lose sight of your investment strategy. Make sure the lower-cost investments that come with a great price also make sense as part of your long-term investments.