How Much is Your 401(k) Costing You?

Daniel Penzing
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Find Out What You're Paying in Fees

It's wise to do a 401(k) plan review to make sure you're getting the most bang for your buck. Be sure to check whether your plan offers target-date funds, a variety of low-cost fund alternatives, and whether you're contributing enough. But there's another potentially big source of hidden costs that few employees are aware of: plan fees. Unfortunately, few employers are eager to explain them to their employees.

When your employer offers to match your 401(k) contribution, for example, you don't just get that contribution — you also get the company's share of the plan expenses. What's more, if your provider charges an administrative and investment fees that are too high, you may be responsible for paying even more.

That's why it pays to do your homework. First, ask your 401(k) plan administrator for an overview of the expense ratios for the funds offered in your plan. Look for the words "administrative fees" and "expense ratio" on the plan's fact sheet.

The expense ratio is the percentage of your assets that your fund manager charges to manage your fund. The administrative fees typically cover record-keeping. A typical large plan pays no more than 0.3% per year for administrative fees.

Use Fee Information to Your Advantage

If you have a 401(k), you also have two sets of fees: administrative fees and expenses. These fees can take a serious chunk out of your nest egg, so it’s important to understand what they are. The fees you are paying cover different aspects of running your 401(k) account, and the amount you spend on fees is typically listed in your summary plan description, which you can find at your plan administrator’s website. It is important that you read your plan summary so that you are aware of the fees you are paying, how your plan fits into the overall financial picture for the employer, and whether your plan’s fees are reasonable and in line with fees for similar plans. Another important thing to keep in mind is that fees can vary between different types of 401(k) plans.

The most common administrative fees are the plan administration and recordkeeping fees. Different 401(k) plans may include these fees in different ways, but they typically include the cost of processing payroll deductions, processing payroll contributions, and processing distributions. Some plans also include fees for actively managing the plan, which can include the cost of monitoring the investment portfolio and other administrative tasks. It is good to look at the list of administrative fees and check to see what additional fees you are paying that fall under the administrative and recordkeeping categories because these fees can be significantly reduced or eliminated.