How do 401k fees work?

If you participate in a 401(k) plan, you may be incurring certain fees in the management of your retirement money. However, the fees you pay on your 401(k) are not obvious, and you need to figure out what fees you are paying. A survey by TD Ameritrade of 1000 investors shows that only 27% of investors know how much fees they are paying in their 401(k) plan. This means a whopping 73% of investors either don’t how much 401(k) fees they are paying or they don’t know how to determine the fees they are paying.

401(k) fees comprise investment fees, administrative fees, and individual service fees. Some of these fees may be borne by the employer at the plan level, whereas employees incur costs related to their investment options. 401(k) fees cover record-keeping, investment advice, customer service representatives, online transactions, retirement planning software, etc. On average, 401(k) fees may range from 1% to 2%, depending on the 401(k) plan.

What is the typical average 401(k) fee?

The Department of Labor requires 401(k) plans to charge reasonable fees (PDF), but it does not specify the actual amount that plans can charge. Usually, 401(k) fees vary depending on the number of participants, the size of retirement assets per participant, and the size of the 401(k) plan. Large companies with more employees and more retirement assets tend to charge lower 401(k) fees.

Typically, most 401(k) plans charge anywhere from 1% to 2% of your retirement assets. However, large 401(k) plans may charge lower fees of 0.25% to 1% for participants with retirement savings exceeding $1 million. In comparison, small 401(k) plans with fewer assets under management may charge as high as 3.5% for 401(k) accounts.

Categories of 401(k) fees

A typical 401(k) plan may charge participants three categories of 401(k) fees:

Investment fees

Investment fees take up the largest portion of 401(k) fees, and they cover the cost of managing the investment. These fees may be broken down into expense ratios, sales loads, and other costs, and you incur these fees in the form of an indirect charge against your 401(k) balance since these fees are deducted from your investment earnings. Investment fees are charged as a percentage of the assets you hold in your 401(k). For example, if the plan charges 1% in investment fees, you could pay $1000 if you have assets worth $100,000.

Administrative fees

Administrative fees are the costs deducted from your 401(k) to cover the cost of maintaining the plan i.e. record keeping, education materials, accounting, legal, etc. The plan may also offer additional services such as educational seminars, telephone services, investment advice, online transactions, and retirement planning software. Although most employers pay these costs, some employers may pass on this cost to participants as a flat fee or percentage of the retirement assets.

Individual service fees

You may incur these fees when you opt-in to certain optional services like financial advisory services, rolling over 401(k) into an IRA, or borrowing from your 401(k) account. For example, if you take a 401(k) loan, you may incur a loan original fee of about $75, depending on the amount borrowed. Individual service fees are charged separately to participants who take up certain optional services.

Factors that impact 401(k) fees and expenses 

Some of the key factors that determine the amount of 401(k) fees you may include:

How funds are managed

Actively managed funds are managed by an investment adviser who is tasked with researching, monitoring, and trading the holdings of the fund to maximize returns. Hence, these funds have higher fees to compensate the investment advisors.

On the other hand, passively-managed funds have lower fees, since the funds attempt to earn returns from an established market index by replicating the holdings of that index.

Size of the plan

401(k) plans with a large pool of assets have the freedom to invest in specialized funds or classes of stocks that are usually sold to large investors. These funds may charge lower fees, hence the plan may charge lower fees to participants.

Optional features

Taking up additional 401(k) plan features such as loan programs and insurance programs will cost extra fees. Before agreeing to the features, you should weigh their benefits to you, and only take advantage of optional features that you need.

Who pays the 401(k) fees?

Both employers and employers may be responsible for some of the 401(k) fees. Here are the fees paid by each party.

401(k) fees paid by the employer

Some employers may decide to pay the administrative and fiduciary fees in the 401(k) plan. Administrative fees are paid to support the normal operations of the plan, while fiduciary fees are paid to 401(k) advisers who offer services such as employee engagement and training. The employer may decide to pay the entire administrative and fiduciary costs or pass on part of the cost to employees.

401(k) fees paid by employees

401(k) participants may be required to bear the cost of investment and individual service fees, and in some cases, part of or all the administrative costs. Investment fees are charged on investment returns from mutual funds, stocks, and stocks. Employees participating in the plan also pay individual service fees if they take advantage of optional services such as 401(k) loans. If the employer passes on the administrative expenses to employees, the employee may be required to bear the additional cost.