How much are 401k fees?

Employer-sponsored 401(K) plans are the most popular retirement savings plans, and they account for 20% of the total retirement savings in the United States. However, despite their popularity, most 401(k) participants do not understand how 401(k) fees work. A study by TD Ameritrade found out that 37% of 401(k) participants did not know how much fees they were paying, and only 27% were aware of the fees they paid.

401(k) participants pay an average fee of 0.97%, depending on the value of plan assets or total 401(k) balance. Large 401(k) plans that manage over $100 million in assets typically charge 0.5% to 1% in annual 401(k) fees, while small plans charge from 1.5% to 2% in annual fees, and the fee can increase to more than 3.5% annually.  

Average 401(k) fees

On average, most 401(k) plans charge an average 401(k) fee of 0.97% of 401(k) assets value. Large 401(k) plans with an asset base of $100 million or more charge less than 1% in 401(k) fees, and this rate can go under 0.5% for the biggest 401(k) plans.

However, small 401(k) plans within under $100 million in assets charge anywhere from 1.5% to 2%, while plans with less than $50 million in assets under management can charge above 2% in annual fees.

While the 401(k) fees may appear small, they can take a chunk of your retirement money. If the plan charges a percentage of your plan assets, this cost could amount to tens of thousands of dollars over time from your nest egg. While the Department of Labor does not specify the amount of 401(k) fees plans can charge, it requires 401(k) fees to be reasonable.

Key types of 401(k) fees

The following are the main categories of 401(k) fees:

Investment fees

Investment fees account for the biggest portion of 401(k) fees, and they can be broken down into sales loads, expense ratios, and other fees. These fees are charged as a percentage of assets held in your 401(k) account. They are deducted directly from your investment earnings, and they can be charged as indirect costs against your 401(k) balance.

Plan administration fees

These fees are charged by the 401(k) provider managing the plan, and they cover services such as record-keeping, accounting, legal, and trustee services. Plan administration fees may also cover additional services you receive like customer service, educational seminars, etc.

Plan administration fees can be charged against the employer or the employee. If the fees are passed on to employees, they can be charged as a flat fee or as a percentage of the assets held in a 401(k) plan. The more services a plan provides to its participants, the higher the plan administration fees will be.

Individual service fees

When you opt into additional plan features like 401(k) loan, 401(k) rollovers into an IRA, or financial advisory services, you will be charged individual service fees. These fees are charged separately to individual service accounts when a participant takes up an optional plan feature. Before taking up a plan feature, you should find out the fees you will pay for the additional feature.

How to find out the 401(k) fees you are paying

If you want to know the amount of 401(k) fees you are paying, there are several places you can check depending on who is charging these fees.

401(k) provider fees

You can check the fees charged by the plan administrator on the plan's provider website or in company marketing material provided at the time of enrollment. These fees may be charged against the employer or employee.

Expense ratio

The expense ratio includes expenses such as accounting expenses, legal expenses, fund management, and administrative expenses.

The expense ratio is expressed as a percentage of assets under management. For example, if you have $50,000 worth of retirement assets and the plan charges a 5% expense ratio, you will pay $2500 annually in expense ratios. You can determine the total expense ratio by multiplying the weighted expense ratio of each investment option by the 401(k) account balance.

Front-end and back-end loads

A front-end load is a sales charge applied when you purchase an investment while the back-end load is applied when you sell the investment. These funds are associated with mutual funds, and they are calculated as a percentage of the investment value. You can find these expenses on the issuer’s prospectus.

What to do about 401(k) fees

When you have high 401(k) fees in your 401(k), there is nothing much you can do about it. However, when you are aware of the fees you are paying, you can make better investment decisions.

If you are paying a high fee for an individual fund within a 401(k) plan, you can compare the fund against other alternative funds. When you have a choice between two competitive funds, choose the fund with the lower fees.

If you discover that you are paying above average fees for an investment in your 401(k) plan, you can raise the issue with the plan administrator to see if the fees can be reviewed. You can also request the plan administrator to include low-cost investment options.