Navigating Fees & Expenses

Understanding the fees and expenses associated with your 401(k) plan is important for two reasons. First, as the plan sponsor and fiduciary you have a legal and moral obligation to make sure plan participants are not paying too much for the services they receive.  They do not have a choice in plan costs, you do.

The second reason you need to understand the fees and expenses associated with your account is that they can significantly reduce your overall return on investment. For example, if your investment return is 7 percent, but your fees are 1.5 percent, your actual return is 5.5 percent.

For an employee with 35 years until retirement and $25,000 in a 401(k) plan, return on investment over the next 35 years at an average rate of 7 percent with fees and expenses of 0.5 percent would result in a balance of $227,000 at retirement.  If fees and expenses are increased to 1.5 percent, that same employee would have a balance of $163,000 at retirement. Just a 1 percent increase in fees would reduce that employee’s account balance 28 percent.

Typically, 401(k) fees fall into three categories: investment, administrative and individual service fees.

Investment Fees

Usually the largest fee you’ll pay, the investment fee covers the cost of managing the investment and is commonly displayed in mutual fund prospectuses and annual reports. Some mutual funds charge what is known as a load fee—an industry name for a sales charge or commission.  Others charge something known as a 12b-1 fee (named after the section of the Security and Exchange Commission’s rules regulating their disclosure). These fees cover the management of the investment and can range between 0.25 and 1.0 percent annually. 

In total, investment fees can range from 10 basis points (in index funds) to 1 to 3 percent (in actively managed funds).

Administrative Fees

Administrative fees cover the everyday costs of maintaining a 401(k) plan, including record keeping, accounting and legal costs, and providing educational material, websites and access to investment advice and customer service.  Administrative fees can run from $20 to $200 per participant, and can be paid either by the employer or participant. These fees may or may not be disclosed.

Individual Service Fees

Individual Service fees are typically charged for special plan features (like access to a brokerage window) or for specific transactions like loan or hardship withdrawals, or withdrawals after terminating employment. These fees can range from $20 to more than $150.

Determining your plan’s real overall costs after fees is a significant challenge with no best solution. 401(k) programs come in a variety of shapes and sizes with a multitude of options. Informed decision making is neither easy nor magical, but it’s not impossible. Consulting with an informed financial advisor can help you customize the plan that works best for your company.