A 401(k) plan is one of the most common ways to save for retirement. They provide a lot of value through things like tax deferral and employer matching. But they aren’t free.
If you participate in a 401(k), you’ll pay fees that can vary significantly from plan to plan, and they aren’t always obvious. You’ll need to make a conscious effort to figure out what your fees are, which is good to know, because you may be able to reduce them.
Your 401(k) fees typically fall into one of three categories. Learn how these fees work and who pays them.
- A 401(k) is a popular retirement investment, but there are expenses you’ll have to pay.
- Expenses can vary from plan to plan, so take the time to figure out your plan’s expenses.
- Investment fees are the most significant component, so try to get low-cost options.
- You may be able to lower your expenses by rolling a 401(k) into an IRA.
Types of 401(k) Fees
There are three main types of 401(k) fees: administrative, investment, and service. You pay some of them as the participant, while other fees are incurred at the plan level.
According to 2020 data from the “401(k) Averages Book,” a plan with $5,000,000 in assets and 100 participants will have a total average fee of 1.20%, or $604 per person. Management fees account for $562 of that overall cost, while administrative fees account for the remaining $42.
Plan Administrative Fees
This fee covers what you’d expect an administrative fee to cover—the cost of operating the plan. Maintaining a 401(k) plan requires record keeping, customer service representatives, education materials, as well as the following expenses:
- Retirement planning software
- Investment advice
- Online transactions
- Electronic access to your plan information.
The largest component of the fees you’ll pay in a 401(k) plan are those linked to the investments themselves. These include sales charges, management fees, or other administrative fees of the investment options. You can find the fees in your 401(k) summary plan description or by looking up each fund’s prospectus.
The fees are often expressed as a percentage of the assets you have in the investment. Grouped together, the fees are typically referred to as an “expense ratio.” For example, if the expense ratio is 1%, then you’d pay $100 per year for every $10,000 you’ve invested. The average expense ratio in 2017 was 0.79% for smaller plans with less than $1 million in total assets and 0.34% for plans with more than $1 million in total assets.
Individual Service Fees
In addition to administrative and investment fees, you may incur individual service fees if you take advantage of optional plan features. For example, if you take out a plan loan, then you may have to pay an origination fee, which is typically $50 or $75.
Who Pays 401(k) Fees?
Your employer might cover the fees in your 401(k), but more than likely you are paying all or a portion of them. It depends on the type of fee and how your plan handles it.
Investment Management Fees
Investment management fees are almost entirely paid by the plan participant. A 2018 survey conducted by Callan found that in 85.6% of plans, these fees are completely paid by the participants, and just 1.7% of plan sponsors pay them.
Since investment management fees are such a significant portion of the total fee, ask your employer to review the plan and consider adding less expensive options like index funds (if they aren’t already there).
Administrative fees are more likely to be paid for by the employer (“plan sponsor”). Nearly 18% of employers pay all administrative fees, and another 19.5% of plan sponsors pay a portion of them. Still, participants pay for some or all administrative fees in more than two-thirds of plans.
If you pay your plan’s administrative fees, that payment happens in a couple ways. They might be paid through deductions from the investment returns that you and other participants earn, or they may be distributed among the participants as a flat fee or in proportion to each participant’'s account balance.
Other 401(k) Fees
Aside from administrative, investment, and service fees, you may pay fees for some of the assets in your investment portfolio. For example, your 401(k) might include mutual funds that incur sales charges, broker commissions, and fees for promoting the fund. Stable value funds may also charge investment management and other fees.
401(k) Fees vs. IRA Fees
If you are still with the employer that sponsors your 401(k), you may not have an option to roll it into an IRA. Once you leave, then you may want to consider doing that. So, how do the fees compare between 401(k) plans and IRAs?
IRAs won’t have plan administrative fees, because there isn’t a “plan.” IRAs are by definition individual accounts. However, you could have an annual account fee that varies depending on where you open the IRA. Vanguard IRAs have a $20 annual fee, charged per account or mutual fund, but it can be waived if you meet minimum asset values.
You will still have investment management fees. For example, Fidelity provides traditional IRAs that have account and advisory fees ranging from $0 to $250 per year per $50,000 invested, plus fees (in some cases) charged by assets within the IRA. The advisory fee range is considerably lower than the $562 average yearly 401(k) management fees paid for $50,000 invested.
You can choose where you open your IRA and the investments you pick, however, so it’s easy to manage your fees by choosing a provider that offers index funds with low expense ratios.
Unless you have a very low-cost 401(k), you will likely be able to reduce your cost by rolling it into an IRA, as long as you are mindful of your choice.