The difference between typical and expensive 401(k) fees can come down to a single percentage point, but most people have no idea what they're paying

  • Many people using an employer-sponsored 401(k) to save for retirement don’t know how much they’re paying in management fees, or what those fees are for.
  • There are two types of fees: those charged by the 401(k) provider, and those charged by the mutual funds or ETFs in the account.
  • Fees alone aren’t enough reason not to use a 401(k), but an account being charged 2% or more has relatively high fees, and that money might be better off elsewhere.

A 401(k) is a tax advantaged account with much higher annual contribution limit than an IRA, and if your employer offers to “match” – contribute to the account as you do, matching a percentage of your contributions – most people consider that free money.

This type of retirement account is among the most popular in the United States. At the end of 2018, 401(k) plans held an estimated $US5.2 trillion in assets, about 19% of retirement savings in the US, according to the Investment Company Institute.

But some other statistics are a bit more startling. A survey from TD Ameritrade found that only 27% of people surveyed knew how much they’re paying in 401(k) fees.

The existence of fees isn’t enough to make a 401(k) not worth it – especially if you get an employer match – but fees can add up.

If you don’t know what you’re paying, or if what you are paying is reasonable, read on to learn more about the typical 401(k) fee in the US and how you can minimise their impact on your retirement.

Average 401(k) fees in the United States

Your 401(k) fees don’t all come from one place. There are two general types of fees you will see in your account:

  • Fees charged directly by the 401(k) plan provider
  • Fees charged by the mutual funds and ETFs in your 401(k) account

While you will deal with some level of fund fees even outside of a 401(k), you have more freedom to choose your investments when you invest outside of an employer-sponsored plan. That said, there’s no one-size-fits-all answer to whether an investor should use a 401(k) or not – that depends on factors like whether an employer offers a match for its plans, and what the fee structure looks like for 401(k) and non-401(k) investments alike.

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According to an analysis by BrightScope, large 401(k) plans with $US100 million or more in assets typically charge less than 1% in annual fees. This is a generally competitive rate, and the biggest plans regularly charge under 0.50%.

As plans get smaller, fees go up. The BrightScope study found that small plans often charge between 1.5% and 2% per year, with many charging in excess of 2%.

While 2% may not sound like much, it adds up to a lot in the long run. If you have a $US10,000 balance today and plan to add $US5,000 per year to your 401(k) over the next 30 years, a 2% fee will cost you an estimated $US153,218 over time, according to a calculator at investment website Blooom.

Account management fee

The biggest fee you’ll see referred to as a “401(k) fee” is the plan management fee. Your fees are generally deducted automatically in a way that makes it feel like you are not paying any fees at all. But as we saw from the maths above, even 2% can take a huge chunk from your retirement savings.

Fees around 0.50% are reasonable for a 401(k). Anything over 1% is getting into a territory that’s more beneficial to the plan manager than the savers.

Again, the fees are probably worthwhile if you get an employer match for your 401(k) contributions. If you can get 2%, 3%, or more of your pay added on just for saving for retirement, you should do it even if there are fees on your investments.

Mutual fund and ETF fees

When you’re staring at the fees charged by your 401(k) account itself, it is easy to forget about the fees charged by each underlying investment. Hopefully, your 401(k) offers investments you can buy and sell with no load fees or transaction fees. But that doesn’t mean the funds are free.

Most mutual funds charge an annual management fee reported as an expense ratio, or fee rate as a per cent of assets. If you have $US10,000 in a fund with a 1% expense ratio, you would pay $US100 per year to have those funds managed.

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Some funds charge additional marketing fees, so beware which funds you choose to invest. Funds from Vanguard, Schwab, and Fidelity tend to charge less than 0.20% in fees. Other funds charge well over 1%. Every investor should know and understand where their money is going.

Rolling over your old accounts could save you fees

If you ever leave a job with high 401(k) fees, you could consider doing a rollover – move your savings from one account to another by calling your plan manager – when you leave to cut those fees to zero.

Or, if you have a string of old 401(k), 403(b), 457, or other retirement accounts at old employers, a good option is to merge and simplify. A 401(k) rollover allows you to merge the balances in a new Rollover IRA. This account offers the same tax advantages, but it is free from most brokerages and gives you the ability to invest in whatever you want.

Most 401(k) accounts, and most investment accounts of any kind, have some level of fees. This doesn’t automatically mean they’re too expensive or not worthwhile – it just means you’ll need to read the fine print, and decide for yourself where you want to keep your money.

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