Are Your Retirement Savings Vanishing Without You Knowing?
Hidden 401k fees can lead to your retirement savings vanishing without you knowing. Discover what to do if your retirement account fees are too high.
Published March 3rd, 2021
Reading Time: 4 minutes
Employer-sponsored 401(k) plans are among the most popular choices for retirement savings. In fact, about 20% of all retirement savings in the United States are in 401(k) accounts. The majority of 401(k) plans withdraw employee contributions from their paychecks, which guarantees consistent contributions every pay period. This, paired with the fact that most employers match contributions, makes 401(k) plans one of the best ways to maximize retirement savings.
However, 401(k) plans can still be subject to fees, which many employees are unaware of. A recent survey revealed that over a third of Americans are unaware that they pay any fees on their 401(k) accounts, even though over 95% of 401(k) accounts incur fees and charges. It’s crucial that you understand all of the potential fees that you may be facing so that your retirement savings do not suffer.
Different Types of 401(k) Fees
The U.S. Department of Labor defines the three types of 401(k) fees as investment fees, plan administration fees, and individual service fees.
Investment fees generally make up the largest portion of 401(k) fees and are normally charged as a percentage of assets. These fees include the cost of investment management, any fees from mutual funds you are invested in, as well as possible plan advisor fees. Plans that are actively managed will usually have higher investment fees than plans that are passively managed.
Plan administration fees cover the general management of your account. Many 401(k) plans are through banks, but some are through other financial institutions. Regardless, there are administrators for every account. Plan administration fees cover the administrative tasks like accounting, record keeping, and legal services. Many institutions offer customer service, web services, and educational opportunities, all of which are also funded by these administration fees. Oftentimes employers will cover this fee on behalf of the employee. However, if your employer does not pay this fee, you will either be charged a flat fee or a percentage of the assets.
The last type of fees are individual service fees, which cover additional features that you opt into. Examples of these features could be processing a 401(k) loan, distributing funds, or rolling 401(k) funds into an IRA. If you choose to use any of these features, you will be charged a specific fee for that service. Before taking advantage of any of these potential services, it is important to analyze the cost of the service to make sure that it is worth it.
Where Can I See my 401(k) Fees?
Fortunately for retirement savers, the Department of Labor requires all 401(k) fees to be shown on a 401(k) statement. Although statements are required to show the fees your account is subject to, this does not mean that there aren’t some fees that go unnoticed. It’s important that you know what to look for on your 401(k) statements so that there are not any fees hiding in plain sight.
In most cases, 401(k) fees are not itemized on statements, which can make it more difficult to assess the actual charges that are incurring. Most statements include labels like “Expense Ratios” or “Total Operating Costs As a %.” By being aware of your fees and these terms you can find out how much of your retirement savings are being used to cover these 401(k) fees.
How Fees Can Affect Your Retirement?
The total costs of 401(k) fees can vary greatly depending on the size of the company, the type of plan, and the financial institution that manages the plan. The total fees tend to range anywhere from around 0.4% up to 1.4% per year. In most cases, the smaller plans tend to have higher fees.
If you have a 401(k) plan that is subject to higher fees, they could be eating into your retirement savings and canceling out any tax benefits that a 401(k) may offer. Regularly checking your 401(k) statements and analyzing your fees can help prevent this, making sure that you are not paying more in fees than you are comfortable with.
What Can I Do if My Fees Are Too High?
In most cases, it still makes sense to continue contributing to your 401(k) even if it is subject to higher fees. Despite the higher fees, a 401(k) plan with employer-matched contributions is still a great option for those that want to ensure they have retirement savings in place.
If you feel that your 401(k) fees are too high, you have a few options. You could bring this issue to your company’s human resources department to see if there are any solutions. If employees feel that the current 401(k) provider’s fees are too high, the employer may be able to shop around for a cheaper plan for employees. It may also be possible to add more index funds to your investments, which tend to be lower cost. Many 401(k) plans offer lower cost investment options, but these are not always a “better” option. It is best to discuss your investment options and retirement goals with an experienced financial advisor to ensure that you are making the best decision.
If you have already left a company that you had a 401(k) account with, determining which fees your account is subject to can be an important factor when deciding what to do with the funds. If your current plan has lower fees and a large amount of investment options, it might be best to leave your funds in that 401(k) plan. If you are moving to a company that offers a plan with lower fees, then it could be beneficial to move the money into your new employer’s 401(k) account. Additionally, if you find out that you have a smaller plan subject to high fees, it could make sense to roll the money into an IRA.
In any case, having a solid understanding of your 401(k) fees and how they work can equip you to make the best decisions for your financial future. Planning your retirement savings with a financial advisor is the best way to make sure that you are maximizing your retirement savings and not paying any unnecessary fees.
Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Ready to Get Started?
Real financial planning should pay off today, and in 10 years' time.