Magnifying glass and 401(k) logo

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The typical American worker, earning a median salary starting at age 25, will pay an estimated $138,336 in 401(k) fees over their lifetime. That's a lot of money, considering that it equals more than two and a half years' worth of a typical household's earnings.

A recent study by the Center for American Progress concluded that "the corrosive effect of high fees in many ... retirement accounts forces many Americans to work years longer than necessary or than planned."

Are you getting what you pay for when it comes to 401(k) fees, or are you getting ripped off? Is there a way to figure out whether you're one of the unwitting victims of the financial industry's self-serving fee structure?

Little fees add up over time
One of the biggest problems with 401(k) fees is that they look small on paper. For instance, the Center for American Progress found that the average 401(k) plan charges fees of approximately 1% of assets managed.

That may not seem like a steep charge in any given year, but thanks to the law of compounding returns, if you're saving over the course of several years or even decades, even a small percentage like this adds up to a huge number over time.

Consider this example from the Department of Labor:

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.

All told, the Center for American Progress estimates that a typical worker -- earning the median income and paying the average 401(k) fees over their lifetime -- will be assessed a total of $138,336 in fees. And the cost is much more severe for high-income workers, who, assuming a starting salary of $75,000 at age 25, are projected to pay an estimated $340,147 over their lifetimes, thanks to the fee structure of the average 401(k) plan.

Do workers get what they pay for?
All of this would be much ado about nothing if workers got a valuable service in exchange for these fees. But research strongly suggests that higher 401(k) fees don't translate into higher returns for plan participants.

It's been widely suspected since at least the mid-1960s that actively managed mutual funds generally underperform passive, low-fee broad-market indexes. Fees are one of the main reasons for this, but even excluding the depressing effect of fees on a fund's returns, the funds that charge higher fees tend to perform worse than funds that charge low fees. A seminal 2009 study on the relationship between mutual fund fees and performance found "a puzzling negative relation between before-fee risk-adjusted performance and fees in a sample of U.S. equity mutual funds: funds with worse before-fee risk-adjusted performance charge higher fees."

Needless to say, this pivotal finding shows the importance of knowing how much your 401(k) plan charges in fees.

Do you know what you pay in fees?
Figuring out what you pay in fees seems easy in theory, but it's unfortunately more complicated in practice.

First of all, the variety of fees tends to mask their cumulative impact. There are plan administration fees, investment fees, and individual service fees, among others. Secondly, 401(k) administrators often couch their explanation of fees in long-winded and esoteric language; plan disclosures routinely exceed dozens of pages.

It's up to you to figure out your 401(k) plan's expense ratio. You can do this by adding up all of the fees assessed against your account in any given year and then dividing them by the value of the account's holdings. According to the 401k Averages Book, this ratio should fall between 0.31% on the low end and 1.88% on the high end.

The table below illustrates the impact fees have on the value of a hypothetical 401(k). It shows what happens over 25 years to a one-time $10,000 investment that earns 10% before fees under three different fee scenarios.

Expense Ratio Scenario

Value of $10,000 Invested for 25 Years at an Average Annual Growth Rate of 10%







Source: Selena Maranjian, If Your 401(k) Plan Is Doing This, You're in Trouble.

As you can see, fees matter a lot when it comes to the long-term value of your 401(k). It isn't unreasonable to conclude that they can spell the difference between retiring in comfort and having to scrimp in save later in life.

What can you do if your plan's fees are too high? You can explore your plan's alternative offerings and choose the lowest-cost options, typically broad-market exchange-traded funds. Or, if there aren't sufficiently attractive alternatives, you can minimize your 401(k) contributions and redirect that money to an IRA or other type of retirement account. Either way, you'll thank yourself later by locking in a much more comfortable retirement.