An Overview of 401(k) Fees
401(k) penalties and fees can really eat into your savings for retirement. What are the 401(k) fees that you should be aware of, and how can you minimize them?
December 6, 2021
If you have a 401(k) from work, you probably contribute a small amount from each paycheck and don’t think about it much after that. While this set-it-and-forget-it approach is actually effective for building long-term wealth, there is one catch: 401(k) accounts often have fees.
401(k) fees can really eat into your long-term returns. This article provides an overview of the most common 401(k) fees, and what you can do to minimize their impact.
What are 401(k) fees?
401(k) fees are fees charged by the 401(k) plan provider or administrator and by the funds or ETFs that are purchased in the account. Here are some of the different types of fees you may face in your retirement account.
Administration and management fees
The 401(k) provider — Fidelity, ADP, Empower, etc. — will likely charge an investment management fee. This can be a percentage of the account balance, a flat fee or both.
Many providers charge an asset-based fee of 0.25% to 1% of the account value each year — this is typically the primary fee from the plan provider
Some providers have flat monthly fees or other administration fees
Some providers have a plan maintenance fee that may be billed to your employer or split up and billed to all plan participants
Other miscellaneous administration fees may apply
Investment fees and expense ratios
There are also fees for specific investments within the account. Most mutual funds, ETFs and other investment products have various fees which are collectively referred to as the fund’s expense ratio.
This includes 12B-1 fees and marketing fees
Expense ratios can range from 0% to 1% or more
Each mutual fund or ETF has a different expense ratio
Some funds may also charge load fees, which are upfront commissions charged when you first purchase a fund
There may be other fees that some plans charge, including but not limited to:
Transaction fees on buying or selling assets
Transfer fees for transferring assets or changing plan providers
Individual service fees for optional features (such as a loan from the plan)
Inactivity fees for old accounts
Fees for rollovers and account transfers
Check with your Human Resources Department for details on all the relevant fees.
Penalties are another category of costs that may be associated with 401(k) plans. These are not routine costs and only apply in certain situations.
For instance, you may pay a penalty for early withdrawals before the planned retirement date. In this case, you may pay a small penalty to the plan provider, but the more significant penalty will be applied by the IRS.
If you withdraw funds before the designated retirement age — 59.5 or 65, depending on the plan — you may be subject to a 10% penalty plus income tax on the withdrawal. Learn more about 401(k) penalties on the IRS website.
Additionally, some plan providers may charge extra fees or penalties if you leave the account dormant and don’t contribute new money to it. Check with your HR or plan provider for details.
Average 401(k) fees
The average 401(k) plan participant pays fees of approximately 0.45% of assets per year. That means an individual with $100,000 invested will pay approximately $450 per year in fees.
The average American with a 401(k) had $129,157 in their retirement plan in 2020. This means that, on average, Americans with 401(k) plans pay approximately $581.20 in fees each year (based on the average 0.45% fee rate).
However, these fees vary widely. The study found that the largest providers offered fees as low as 0.37%, while some smaller plans and smaller providers had fees of up to 1.42% or more.
The impact of 401(k) fees
Plan participants don’t necessarily see these fees, but they still reduce investment returns. For instance, if you pay 0.45% in fees per year and the stocks you own appreciate by 10% in a year, you may only gain 9.55% due to the fees that are subtracted from returns.
Worse yet, fees are taken even if the market is down. If your shares end up 10% lower after a year, you have actually lost 10.45% in total.
The problem is magnified for plans with higher expenses — some small 401(k) plans may have fees of 1% to 2% or more.
The long-term effect of these fees can be huge, as demonstrated by Vanguard.
If you invest $100,000 in a plan with 0% fees and earn 6% returns for 25 years, you will end up with approximately $430,000.
But if you invest that same $100,000 in an account with 2% fees, you’ll end up with only $260,000 after 25 years. This means that the 2% fee, which doesn’t seem hugely significant in any given year, winds up costing you $170,000 in lost investment earnings.
How to minimize 401(k) fees
It’s generally impossible to completely eliminate fees on your retirement plan, but here are a few ways you may be able to minimize their impact.
Choose the right investments
Most 401(k) plans have access to a wide range of investment options. Each mutual fund or ETF may have a different expense ratio and fee structure. Look for investments that have a lower expense ratio.
Don’t withdraw early
Early withdrawals before the designated retirement date can result in a 10% penalty from the IRS. Avoid this by keeping funds invested until retirement.
Consider a rollover
A 401(k) rollover is when you transfer a retirement plan from one provider to another. For instance, if you leave a job, you can transfer the funds in your 401(k) plan to a new 401(k) at a broker. See this guide for details.
Take advantage of employer matching
Many employers provide a matching benefit, which means they will match a certain amount of money that you contribute to your 401(k) each year. It’s important to maximize this benefit and make it a top priority when you’re investing — it can also help to indirectly offset some of the fees you pay.
Consider other investment options
You can also start saving money outside of your 401(k), potentially in an account with fewer fees. See our guide to saving for retirement for details.
401(k) fees can add up over time, reducing the wealth you accumulate. Minimizing these fees can help you reach your retirement goals.
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