How Much Your 401(k) Fees Are Costing You — and How To Lower Them

Corporate 401(k) plans are one of the most popular ways for Americans to save for retirement . According to the Investment Company Institute , 401(k) plans held $7.4 trillion in assets as of the end of 2023, with roughly 70 million active participants. These plans are popular for a number of reasons. First, contributions are made on a pretax basis, lowering the tax bills for Americans. Second, earnings grow tax-deferred until withdrawn, leading to larger balances. Third, many Americans aren’t comfortable with or knowledgeable enough to manage their own investment accounts, and the mutual fund/exchange-traded fund structure used in most 401(k) plans makes it easy for them to begin and maintain an investment program.

An additional important benefit when it comes to 401(k) plans is that most employers match at least a portion of employee contributions. This can boost returns more than any investment success. If you contribute $5,000 per year to your 401(k) and your employer matches $2,500, for example, that’s an automatic 50% return on your investment right off the bat.

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To boost returns even more, it’s important to keep an eye out for 401(k) fees. While any investment fees drag down performance, 401(k) expenses can be insidious. This is because they are nearly unavoidable, are often hard to find and, in some cases, can be much higher than you’d pay just managing your own investment account.

To help prevent 401(k) fees from destroying your retirement, it pays to educate yourself. To that end, here’s a look at the type of 401(k) fees you’ll want to watch out for, how much damage they can cause to a long-term investment portfolio and what you can do to help minimize these fees .

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Common Types of 401(k) Fees

According to the U.S. Department of Labor , there are three common types of 401(k) fees: plan administration fees, investment fees and individual service fees.

Plan administration fees cover the day-to-day operations of running a 401(k) plan, such as recordkeeping, valuation services, legal services, accounting and trustee services.

Investment fees are usually the single largest portion of overall 401(k) fees and are paid to the financial managers who actually pick and choose the investments that are held within a 401(k) plan.

Individual service fees apply only to plan participants who choose to use optional features within a plan. For example, if you take a loan out against your 401(k) plan balance, you’ll have to pay additional fees that other plan participants may not.

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What Are Standard 401(k) Fees?

Plan fees can vary significantly among providers, but larger plans generally have lower fees than smaller ones. For the purposes of a 401(k) plan, “small” typically refers to those with $5 million or less in assets.

According to the “ 401k Averages Book ,” the average small plan costs 1.09% in annual fees, while larger plans charge 0.85%, on average.

Where To Find Your 401(k) Fees

It can take some legwork to find the 401(k) fees that you are actually paying. By law, however, they must be disclosed somewhere, either on your statement or in the 401(k) prospectus. These can carry any variety of names, from “Total Operating Expenses” and “Expense Ratios” to “Total Asset-Based Fees” and other specific names, such as “Loan Fees” or “Management Expenses.”

If you can’t locate the fees you are paying on your 401(k) statement, you can ask your financial advisor for help and/or contact your company’s HR department for more information on specific fees and where to find them.

How 401(k) Fees Drag Down Investment Returns

Annual fees of 1.5% in a 401(k) may not seem like a lot. After all, this means for every $100 you invest, you pay only $1.50 in fees. However, a computation by the U.S. Department of Labor and Employee Benefits Security Administration points out just how much of a difference they can make.

For this simple example, imagine that you have $25,000 in your 401(k) plan and that you don’t plan to add to it until you retire in 35 years. Over that time frame, you will earn a 7% annual return and your annual expenses will be 1.5%.

Given those parameters, your $25,000 will grow to $163,000 over those 35 years.

Now, imagine that instead of paying 1.5% in annual expenses, you pay only 0.5%. In that case, your returns will jump a whopping $64,000, from $163,000 to $227,000, amounting to a gain of more than 39%.

Ways To Minimize 401(k) Fees

Unfortunately, there’s not much you can do about the administrative costs that your plan charges. Your employer is the one in charge of picking a 401(k) provider, and if you want to participate in the plan, you’ll just have to deal with those administrative expenses.

However, there are a few steps you can take to minimize your overall 401(k) expenses.

For one, you can take individual service fees out of the equation by avoiding optional plan features. If you never take out a 401(k) loan, for example, you won’t have to worry about paying additional loan servicing fees.

You can also review the investment fees charged by each mutual fund, exchange-traded fund or other investment available in your 401(k) plan and choose the ones with the lowest costs. For example, if your 401(k) plan offers two types of large cap stock funds, choosing the one with the lower fees can reduce your expenses.

Just keep in mind that a lower-fee fund isn’t necessarily the best one in an overall sense. You’ll still want to pick the investments that provide the best returns while still matching your financial objectives and risk tolerance, even if they may cost a bit more.

This article originally appeared on GOBankingRates.com : How Much Your 401(k) Fees Are Costing You — and How To Lower Them