The saying “ignorance is bliss” doesn’t apply to hidden 401k fees. We frequently reference them … and for good reason. According to research from NerdWallet, people with 40 years until retirement could lose as much as $500,000 because of investment fees.
Worse yet. Most people aren’t AWARE they are paying these fees. An incredible 92% of Americans have no idea how much they pay in 401k fees.
We’re going to provide a simple break down of the fees found in your 401k. We’ll also review what, if anything, you can do about them.
Providers Have Three Main Types of 401k Fees
Investment fees are specific to each investment option your plan offers and typically the loftiest type of fee. Luckily, you can usually control – or get help to control – these types of fees. They can be reduced by simply choosing to invest in funds that have lower expense ratios.
Other types of 401k fees, administrative and service fees, are more difficult for you to reduce, as they are an innate part of your provider’s plan.
Here’s the quick overview of the three main types of fees:
- Investment fees – Expressed as an “expense ratio” of anywhere from 0.01% – 3%. Our team will call these “fund specific fees” or “fund fees.”They cover the management of the investments within your plan. And they typically represent the largest component of fees. Generally assessed as a percentage of assets invested, they are deducted directly from your investment returns: Investment fees are taken out annually as a percentage of your investment.
- Sales charges – transaction costs for buying/selling shares
- Management fees – for managing the assets of the fund, often used to cover administrative expenses
- Other fees – to address services such as furnishing statements
- Plan administration fees – The fees charged to keep your plan running. These fees include recordkeeping, accounting, legal and trustee services that are necessary for administering the plan.
- Individual service fees – typically associated with optional features offered under a 401k plan. Some additional services may include access to a customer service representative, educational videos or seminars, planning software, investment advice, or online transactions. The more services provided, the higher the fees. The cost typically corresponds with the size of your employer’s 401k plan, i.e. there are benefits of scale (the following are the typical fees by employer size):
- 1.4% for small employers
- 0.85% for medium-size employers
- 0.5% for larger employers
Investment Fees Pile On – They’re Vermin You Want to Control
We sometimes hear from people that they don’t need to worry about investment fees because their account balance is relatively small. But here’s the rub: Fees negatively affect your 401k (or other employer-sponsored retirement plan) in several ways.