401(k) Fees: What Plan Sponsors and Participants Need to Know

Bad news: 401(k) fees can eat into your retirement savings more than you might realize. These include administrative fees, fund expense ratios, and sometimes hidden costs. You need to understand these fees because they can significantly impact your investment growth over time.
Author: Penelope Team
401(k) Fees: What Plan Sponsors and Participants Need to Know

By identifying and managing these fees, you can ensure a larger portion of your money remains invested and grows, setting you up for a more secure financial future. 

Let's go over your plan details to pinpoint where you might be paying too much and discuss strategies to reduce these costs.

What Fees Are Included in Your 401(k)?

When choosing a 401(k) plan, you need to be aware of the different fees involved because they can substantially reduce your retirement funds over time.

Let's go over the main types of fees and charges you'll encounter with your 401(k) plan:

  • Plan Administration Fees: These are necessary for the routine management of your retirement plan, covering things like recordkeeping and legal services. Typically, these costs are shared among all plan participants.
  • Investment Management Fees: These fees are charged for the active management of the investments within your plan. They can range from 0.10% to more than 2% of the assets under management (AUM).
  • Individual Service Fees: If you opt for additional features like loans or hardship withdrawals, you may incur individual service fees. These are only charged to participants who use these extra services.
  • Sales Charges and 12b-1 Fees: Not all plans have them, but you might encounter sales charges when buying or selling mutual fund shares, and 12b-1 fees for fund marketing and distribution.
  • Miscellaneous Fees: These can include charges for special services like investment advice, fund transfers, and finder's fees. Make sure to check your plan's fee disclosure to see what applies to you.

Why Do 401(k) Fees Matter?

Your retirement savings is directly impacted by these 401(k) fees. It reduces the amount of money that can grow through investment. Over the years, even small fees can compound and significantly decrease the total amount you have at retirement.

Here’s why it’s essential to keep a close eye on these fees:

Compound Growth Reduction

Fees are deducted from your account balance, reducing the amount of money that benefits from compound growth over time. Lower balances due to fees mean less money earning interest and dividends, which can add up to substantial losses over decades.

Impact on Investment Returns

High fees can negate the returns from good investment performance. For example, if your investment gains are 7% for the year but your fees amount to 2%, your net gain drops to 5%. This difference becomes more pronounced over time.

Variability in Fee Structures

Different 401(k) plans charge different fees. Some may have higher administrative costs but lower investment fees, and vice versa. It’s crucial to understand what you’re being charged and why, so you can assess whether you’re getting good value.

Availability of Alternatives

Sometimes, by comparing fees, you might find more cost-effective alternatives that offer similar or better benefits without eroding your savings as much.

In essence, being informed about the plan fees you’re paying and actively seeking ways to minimize operating expenses will lead to a healthier retirement fund.

What Are the Main Types of 40(k) Fees

Plan Administration Fees

Plan Administration Fees are essential costs associated with managing a 401(k) plan. These fees cover the administrative services necessary for the day-to-day operation of the plan, including:

  • Recordkeeping: Maintaining accurate records of each participant's contributions, investments, earnings, and withdrawals.
  • Accounting: Managing the plan’s financial transactions and ensuring they are accurately reported.
  • Legal Services: Ensuring the plan complies with federal regulations and handling legal matters that may arise.
  • Customer Support: Providing assistance to plan participants regarding their accounts and investment choices.

These fees can be structured in various ways depending on the plan. They might be charged as a flat fee, as a percentage of plan assets, or per participant.

Often, retirement plan sponsors might choose to cover some or all of these costs, but frequently, they are passed on to plan participants, affecting overall investment returns.

Investment Fees

Investment fees are charges associated with the management of the investments within a 401(k) plan. These fees are one of the most significant costs in most retirement plans and can vary widely depending on the specific investment choices. Here’s a breakdown of the common types of investment fees:

  • Expense Ratios: This is the most common type of investment fee, which covers the cost of managing the investment fund. It is expressed as a percentage of the assets you have invested in the fund. For example, an expense ratio of 0.5% means that you will pay $5 annually for every $1,000 invested in the fund.
  • 12b-1 Fees: These are included in the fund’s expense ratio and are used for marketing and distribution expenses. A high 12b-1 fee can be a red flag because it suggests that a significant portion of the fund’s expenses is going toward advertising rather than managing the fund's investments.
  • Management Fees: These fees pay for the investment decisions made by the fund managers, including the selection of securities and the timing of their purchase and sale.
  • Sales Loads: Some funds charge a sales load, which is a fee to buy into or exit from the fund. These can be "front-end" (charged when you buy the fund) or "back-end" (charged when you sell the fund) and are designed to compensate the brokers who distribute the fund.

Individual Service Fees

Individual Service Fees in a 401(k) plan are specific charges that apply only to participants who choose to utilize certain features or services beyond the standard offerings of the plan. These fees are not part of the regular administrative or investment costs that all participants might pay. Here are some common types of individual service fees:

  • Loan Origination Fees: If you decide to take a loan from your 401(k), there might be a fee for processing and setting up the loan. This covers the administrative work involved in managing and tracking the loan.
  • Withdrawal Fees: Some plans charge fees for processing certain types of withdrawals, such as hardship withdrawals. These fees compensate for the additional administrative work required to assess and process these requests.
  • QDRO Processing Fees: In cases of divorce, a Qualified Domestic Relations Order (QDRO) allows for part of a 401(k) account to be allocated to a former spouse. Processing a QDRO can be complex, and many plans charge a fee for this service.
  • Investment Advice Fees: Some plans offer personalized investment advice, either through a human advisor or an automated system. Participants opting for these services may incur additional fees.

How to Read Your 401(k) Statements

Here’s a guide to help you navigate the key sections of your 401(k) statement:

1. Account Summary

This section provides an overview of your account, including the total balance at the beginning and end of the statement period, total contributions (both yours and your employer's), any rollovers, and the earnings or losses during the period. It gives you a snapshot of your account’s performance.

2. Contributions

In this section you’ll see detailed information on the contributions made during the statement period. This includes your pre-tax or Roth contributions, any catch-up contributions (if applicable), and employer contributions, such as matching or profit-sharing.

Read more: 401(k) Contribution Limits 2024

3. Investments

This section lists all the investment options within your plan and shows how your assets are allocated among them. For each investment, you'll find the balance at the start and end of the period, purchases, sales, and any changes in value. It often includes performance data, like the percentage change, which helps you assess how each investment is doing.

4. Fees and Expenses

Look for a breakdown of the fees deducted from your account, including plan administration fees, individual service fees, and investment fees. Understanding these fees is essential as they directly impact your investment returns.

5. Personal Rate of Return

This metric shows the performance of your investments over the statement period, adjusted for any contributions and withdrawals. It’s a useful indicator of how effectively your investments are growing.

6. Beneficiary Information

This part confirms the designated beneficiaries for your account, which is crucial for ensuring your funds are distributed according to your wishes in case of your death.

Tips for Reviewing Your 401(k) Statement:

  • Check Contributions: Verify that your contributions and any employer contributions are correctly recorded and match your expectations.
  • Assess Performance: Compare the performance of your investments against relevant benchmarks to see if they are meeting your retirement goals.
  • Review Fees: Ensure you understand all fees charged to your account. High fees can eat into your savings over time. Look for any hidden fees, to reduce your expenses.
  • Update Beneficiaries: Make sure your beneficiary designations are up to date to reflect any changes in your personal circumstances.

Who Pays 401(k) Fees: the Employer or the Participant?

The answer varies depending on the fee type and plan structure.

Employer-Paid Fees

For employers, certain "settlor expenses" — costs associated with the establishment and structural decisions of the plan — cannot be paid from plan assets. For example, fees for consulting on whether to offer a plan must come from corporate funds.

You can use plan assets to cover other administrative expenses associated with running the plan.

As an employer, paying plan administration fees yourself has several advantages:

  • Reduced Fiduciary Liability: Covering these fees reduces the risk of fiduciary breaches associated with excessive fee payments.
  • Tax Benefits: These payments are tax deductible, and with incentives like the SECURE Act tax credits for new plans and automatic enrollment, your savings could increase.
  • Enhanced Retirement Savings: If you participate in the plan, paying these fees can increase your personal retirement savings since more of your contributions remain invested.

Participant-Paid Fees

Participants typically cover fees tied directly to their investment choices and any individual services they use. Investment management fees are deducted from each participant's account based on the specific funds they have chosen.

Fees for optional services, such as plan loans, are paid directly by the users of these services.

Regardless of who pays the fees, if you are the employer, you have an ongoing duty to monitor all plan fees and ensure they are reasonable. This ensures the plan remains beneficial for participants and compliant with regulatory standards.

How to Avoid 401(k) Fees

To minimize 401(k) fees, choose plans with low-cost index funds and scrutinize the expense ratios. Opt for plans with straightforward fee structures and ensure any individual service fees are necessary before using those services.

Regularly review your plan's fee disclosures to stay informed about any changes. Consider negotiating with providers for lower fees, especially as your plan grows.

If you're an employer, consider covering some administrative costs to enhance the plan's value for employees.


What Are Normal 401k Fees?

Normal 401(k) fees typically include plan administration fees, investment management fees, and individual service fees. These generally range from 0.5% to 2% of assets annually, with lower fees often found in larger plans due to economies of scale.

If you need a 401(k) plan, talk to one of our retirement specialists to learn more about our retirement plans at Penelope.

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