401K Fee Secrets
Did you know that your employer-sponsored 401K plan is able to charge you fees beyond the management fees of the funds that you invest in? It’s the dirty little secret of 401K plans. Up until a few years ago, I had no idea that these 401K fees existed. I was under the impression that my employer covered all fees as a benefit to me. I was wrong.
You need to do your homework on this one, because avoiding unknown fees, when compounded over decades, can have a profound impact on your retirement plans. According to the U.S. Department of Labor 401K fee publication:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
That’s worth repeating (and bolding): 1 percent in 401K fees can reduce your retirement balance by 28%.
Where do these fees come from?
401K Fees Fall into 3 Categories
- Plan Administration Fees
- Investment Fees
- Individual Service Fees
Where can you See your 401K fees?
- Your plan administrator should be able to provide you with a list of fees.
- Your annual account statement should list all associated fees.
- Your 401K should have a summary plan description (SPD) that separates what you pay and what your employer pays. This is given to you when you begin your plan and every 5 years.
Where Am I Going with this?
Not knowing what your 401K is costing you prevents you from taking frugal action. If you know your fees, you can:
- Determine if it makes sense to switch to roll old 401Ks into your present 401K if it’s cheaper.
- Determine if it makes sense to roll old 401Ks into an IRA that may be cheaper.
- Look into the self-directed 401K option, which can help you improve your 401K by limiting fees.
- Determine if it makes sense to just get your employer’s match in your 401K and then work on contributing to a Roth IRA or Traditional IRA instead.
Final Thoughts on 401K Fees
This is definitely a case where a little bit of homework (half an hour or so) can literally shave or add years to your working life. So get motivated to look into this and seek professional advice if you need to!
401K Fee Discussion:
- Did you know that your 401K charged you fees beyond trading fees and mutual fund management fees?
- What kind of fees have you been paying to use your 401K?
- Does this make you want to switch to an IRA?
I never would have thought to check the fees myself and I couldn’t be more pleased with what I found. Each participant in my 401k pays the same administrative fee of $25 per year. Plus each fund has a fee that averages 2 basis points or $2/year per 10k invested. Some are as much as 20 basis points for the EAFE international fund. My husband’s employer pays all other fees. After calculating it out I am paying $26/year for the 9k I have invested which works out to 2.8 *tenths* of a percent, much less than 1% in fees. Plus, the more money I have in the account the less I will pay proportionately, since the administrative fee will remain the same. This makes me feel even better about my husband’s employer. Looks like I’ll be keeping my money in this plan for the foreseeable future.
I hate getting nickel-and-dimed like this. I had no idea that 401ks could do this, so I’m definitely going to have it checked out.
I don’t know everything about my Fidelity 457b, but everyone pays about $20/year in admin fees. I’ll have to look closer at my next statement.
Management fees can be a killer.
Also putting off taxes for the future may also be a huge killer.
Better to put your retirement in risk free vehicles and pay the taxes today while you have deductions…
If you google hidden 401k fees you will find a video that was done, and it’s so good.
This is why I tell people to really take a look at your 401k. It may be in your best interest to pay taxes now and put your money in a system that will grow tax free for the rest of your life… infinite banking.
And I wonder what would happen if SS was privatized!
• The 401(k) industry is fraught with hidden fees. This has prompted the Department of Labor to recently legislate a series of reforms to require better fee disclosure. Here is an article explaining some of the reform that is in the works.
So the good news is that changes are coming. The bad news is that that the retirement industry will probably still find ways to hide the fees being taken out from employee’s retirement accounts.
As you hinted at in the question, the first place to look for fees is in the investments themselves. You can look up the “prospectus” of the mutual fund you are invested either through your 401(k) plan or by going online to the Fund Family’s website. These documents disclose all the fees that that the investments management company is taking out of your investment with them, hidden in the daily Net Asset Value (price) of the investment. Some of these fees are used to pay for the management of your investment, but some fees are used to pay kickbacks to the Investment Advisor of your 401(k) plan or even to your 401(k) plan itself.
Another thing to look for are so called “Life Style/Target Date Funds.” These provide another layer of indirection, where an investment manager will model your investment diversification based on a target date. So there might be an option in your 401(k) called the 2040 Retirement Fund, where your investments in that fund become more and more conservative the closer you reach to your retirement date. This may be a great thing, but be aware that you now have 2 layers of fees being taken out. If you are invested in the Fidelity 2040 Retirement Fund, you can view the Prospectus on the Fees that they are taking out. However, you will notice that the Fidelity Investment Manager then invests all the money into a variety of Fidelity Mutual Funds. The Mutual Fund investments then take another layer of fees out of your assets. So Fidelity is in-essence paying themselves twice, and this is very hard to calculate since you cannot easily see all the underlying investments. Here is a link to an example of such an investment:
I think the most insidious way of hiding fees in 401(k) plans is through using a concept called Unitization or Wrap Fee Account. Many 401(k) record-keepers that target small business plans use this method to hide the larger fees they have to charge people for smaller plans. For the 401(k) participant, it appears that you are being offered 20 Mutual Fund investment options. However, if you look at the NAV reported on your shares of ownership, the price does not match the market price reported by the Mutual Fund. This is because the Wrap account is doing the same thing that a Lifestyle fund does. It places a layer of indirection between you and the actual investment, creating its own price. The difference is there may be no investment management happening . Most of your money is invested in the Mutual Fund that you thought you were buying, however undisclosed fees are being pulled out before purchasing that Mutual Fund. Those fees are hidden in the NAV (price) that is reported by the Wrap account.
It is time for 401(k) participants to be aware of all the fees that are being drained from their retirement assets, and the recent DOL legislation will help. If we really want to change things, we need to understand the tricks of the industry and start asking our 401(k) plan sponsors some tough questions.
There are 401(k) record-keepers out there that are trying to break the mold, and offer an unprecedented amount of disclosure and options for 401(k) participants. Although I am biased, I recommend Retirement Revolution. They are new, but, in this case, new is good. The same old, same old, doesn’t cut it anymore.
Best of luck!