Know Your 401k Retirement Plan Fees

2008 August 4
by Kyle Bumpus
from → 401k/IRA, Personal Finance

Fees are bad, and retirement plans are full of them.  Just as your investments compound over time, turning relatively small contributions into a substantial nest-egg, so too do expenses.  Every dollar in expenses taken out of your account today could easily reduce your nest-egg by $30 or more decades from now, just when you need it most.  Simply put, investment costs matter.  Unfortunately, expenses in 401k plans aren’t all that easy to understand or even find out about.  Employers often set up their 401k plans based on what’s least expensive for them, not necessarily what’s best for plan participants.  In order to make an informed decision to contribute to the plan, invest elsewhere, or lobby for change, you first need to know how much you’re paying and where that money goes.  The following is an overview of the common types of fees charged by many 401k plans.

Mutual Fund Expense Ratios

This is your basic mutual fund expense ratio.  It is usually by far the largest fee in your plan and also the most important to look out for.  While most 401k plans are full of expensive, lackluster investment options with little chance of performing well, many also include low-cost, broadly-diversified index funds.  The advantages of index funds are two-fold:  1.)  you never have to worry about  under-performing the market and, 2.)  you save tens of thousands of dollars in investment expenses over your investing career.  That’s not to say you should never buy actively-managed funds, just that the low expenses index funds possess give them an almost unsurmountable advantage over most of their more-expensive brethren.  Great care should be taken to minimize this particular fee and 1% is a reasonable upper-limit on the fees you should be willing to pay.

Plan Administration And Operation Fees

Every plan has a certain amount of administrative overhead:  accountants must be paid, paperwork filed, and salaries paid.  Large employers will often cover the cost of these record-keeping tasks and pass on the savings to plan participants; however, many small employers simply can’t afford to be so generous.  If these expenses aren’t covered by your employer, they must be paid by you, the participant.  To find out whether you or your employer is picking up the tab, get a copy of your plan’s annual report from HR (every company is required by law to make this information available to plan participants) and look under the section titled “Basic Financial Statement.”  Look for a line item called something like “net administrative expense.”  This is the amount of money taken out of the plan before calculating returns to cover plan expenses.  Divide net administrative expense by your plan’s total value (also a line item) to calculate the percentage of your plan’s assets being used to cover plan expenses.  Next, multiply this percentage by your personal account balance to get the percentage of your money being used to pay the bills rather than grow your portfolio.  Remember, these administrative and operation fees are in addition to the stated expense ratios of the mutual funds in the plan.  Just because you’ve chosen low-cost investment options doesn’t mean your plan is inexpensive.  There could be any number of hidden fees you pay but aren’t aware of.

 Individual Service Fees

Many plans offer optional services such as individual investment advice, telephone support, 401k loans, and the like which come with their own fees and expenses born by you and you alone.  Make sure you understand all the fees and financial consequences involved before deciding to take advantage of any of these optional services.

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2 Responses
  1. 2008 August 4

    These fees really suck. I don’t have time to figure these out. I’m better off not putting any money into my 401k in the first place. I don’t believe the ‘free money’ argument pitched by most financial advisers (most of them also believed in the financial industry).

    I think people would be better off paying off their debts and creating a savings account. Saving for retirement before getting out of debt is a foolish idea – even with a company match – that will likely be gone by the time you can take the money out anyway.

    The only good that the govenment created 401k savings plan has brought is that it provided the stock market with a base that cannot be quickly sold. That base is not found in foreign markets, which is why they can dive 50-70% very quickly .

  2. 2009 February 4
    Carol Skinner permalink

    While I applaud your efforts to better educate plan participants, I encourage a better understanding of the 5500. In your article, “Know your 401k fees” you mistaked how a participant can determine how much of their account is “used to pay the bills” and thereby excludes from the investment return calculation. The line item on the 5500 filing entitled, Net Adm Expenses includes MORE than just plan fees. The 5500 form includes benefit payments as an “expense” to the plan, so the net Adm Expense amount INCLUDES the amount paid out to participants. Your overarching logic is correct in that a participant can determine what is being ‘lost’ to internal fees, but the calculation must use only the total of Adm and Investment fees as a divisor into the total plan assets. Additionally, I suggest half-weighting the contributions and benefit payments against the beginning balance, instead of using the ending plan balance. Traditionally, contributions and payments are made throughout the year, not as of the beginning of the year.

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