Whether you know it or not -- and a 2011 AARP study found that 70% of people don't know it -- you pay for the privilege of investing in your company's 401(k). If you're wondering why you've never gotten an invoice, it's because those fees get automatically deducted from the plan's assets. It's almost as though the money was never even there.
But of course it was. As with many investment products, the opacity of 401(k) plan fees makes them susceptible to getting out of hand, which is a problem from a fairness standpoint and from an investing standpoint. High fees are a huge wealth-destroyer, so the more you can do to control them, the better.
So how do you know what you're paying, where the money is going, and what you should do?
Types of 401(k) fees
As a 401(k) investor, you'll largely face two specific fees: those covering plan administration and those covering investment management. Sometimes these fees can be bundled into one complete package, and other times they're charged a la carte -- it really just depends on the plan.
Administration fees cover all the operational aspects of running a 401(k) -- which, as you might imagine, is far from simple. These include accounting, legal counsel, trustee services, and record-keeping. They might also include seminars, customer service, and investment advice, depending on the service levels offered by your company.
Sometimes everything is rolled into one overarching "administration" fee, and other times you'll have separate charges for each service provider.
Investment fees are what they sound like: charges related to the sale and management of your mutual funds or other investments. In addition to the more well-known expense ratio, you might also face sales loads (which are charges that are triggered when you buy or sell a mutual fund), service fees, and commissions for brokers and salespeople. Keep in mind that sales charges aren't the same as commissions; a fund can charge one or both in addition to the expense ratio.
Tackling administration fees
The problem with 401(k) fees isn't just that there are a lot of them. They're also really hard to find.
If you work for a larger company, you might be able to look your plan up online using a tool like Brightscope, which rates 401(k) plans in a manner similar to the way Morningstar rates mutual funds. Other online providers may also have a rating for your plan -- Google around, and you might just find something
Otherwise, you'll need to do a little digging.
To find out about your administration fees, get a copy of your plan's annual report. In the financial section you'll see the total plan expenses. Next, find the benefits paid, subtract it from total plan expenses, and divide the result by the total assets in the plan. What you get back is a percentage; this number will give you a rough idea of the "rate" that you're paying for administration.
By itself, this won't tell you much. But you can find out how much people are paying to participate in a plan of comparable size.
Average fees per asset level
|Plan asset levels||Average total plan cost|
|$800 million-$1 billion||0.44%||0.42%||0.42%|
|$600 million-$800 million||0.45%||0.49%||0.44%|
|$400 million-$600 million||0.50%||0.49%||0.47%|
|$200 million-$400 million||0.53%||0.50%||0.50%|
|$50 million-$200 million||0.66%||0.64%||0.63%|
|< $50 million||0.97%||0.93%||0.94%|
If your plan is expensive, then you might want to think twice about, for example, contributing more the maximum or rolling over your old 401(k) into your current plan -- especially if you can find a lower-cost IRA or other alternative.
Understanding investment fees
While mutual fund fees in 401(k) plans have fallen about 25% in the past decade, there are still many people overpaying for the privilege of investing. The effects can't be underestimated. Even 1% extra in fees every year can add up to hundreds of thousands of dollars in lost performance over your lifetime.
Unfortunately, these fees can also be tricky to find. While mutual fund expense ratios are usually listed rather prominently, commissions, sales charges, and service fees are often buried in prospectus documents. These don't exactly make for easy reading.
If you aren't looking to spend your weekend with a stack of prospectuses, then consider tackling the biggest area: management fees. Rather than chasing returns with flashy (and expensive) actively managed funds, consider shifting your investments to low-cost index funds. They're hardly exciting, but lower fees provide a lower and more reasonable bar for performance -- and put far less drag on your portfolio over time.
It's not exactly a glamorous subject for most investors, but fees are the one of the greatest performance-killers out there. The less you pay now, the more you'll have later, so whatever you can do to lower your costs, do it now. Your retired self will definitely thank you.