Tiny 401(k) fees can take a big bite out of retirement cash
A 1-point difference in 401(k) fees can leave savers with far less at retirement, according to the Labor Department.
By Frankie Delgado · News Reporter
3 min read
A fee that looks harmless on a 401(k) statement can drain tens of thousands of dollars from a retirement account over time.
The Department of Labor illustrates the hit with a worker who has $25,000 saved and 35 years until retirement. With fees of 1.5%, that account could grow to $163,000. With fees of 0.5%, it could reach $227,000, a 28% gap, according to the agency.
Many workers may not realize the meter is running. A 2021 Government Accountability Office study found that about four in 10 workers did not know they paid fees on their 401(k) plans.
Why the fees vary
Teresa Hassara, senior vice president of workplace savings and retirement solutions at Principal Financial Group, said there is no single standard fee level across 401(k) plans.
Costs can depend on the investments in the plan, how an employer structures the plan and the size of the workplace. Hassara said smaller plans often carry higher fees because fixed costs are spread across fewer employees.
According to Hassara, fees often run from 0.3% to 0.5% for large plans, 0.5% to 1% for mid-sized plans and 1% or more for small plans.
Workers do not set their plan fees, but their investment picks can affect what they pay. Hassara said some investment options carry higher built-in expenses than others, meaning a lower-cost fund can reduce the drag on a saver’s account.
The three main fee buckets
The Department of Labor describes several kinds of 401(k) costs. Some are covered by employers, some are pulled from plan assets, and some are charged directly to workers, according to the GAO report.
Investment fees cover the cost of managing the money in the plan. The Labor Department says these charges are deducted from investment returns and usually make up the largest share of a worker’s 401(k) costs.
Administrative fees pay for running the plan day to day, including recordkeeping and accounting. The Labor Department says these costs can also cover customer service or investment advice offered through the plan.
Individual service fees may apply when a participant uses certain optional features. The Labor Department gives examples such as taking a loan or completing other optional transactions.
Higher fees are not automatically a red flag, Hassara said. She said administrative costs can be higher when a provider is paying for services such as employee education campaigns meant to help workers make better investment decisions.
How to find what you are paying
Fees can move over time, so workers may need to check more than once. Hassara said plan sponsors often review and negotiate fees for participants to keep them competitive with the market.
If a plan’s fees change, employers generally must notify workers within a 30- to 90-day window, Hassara said.
Workers can also find fee information in an annual disclosure notice known as a 404(a)(5), and on quarterly account statements. Hassara said those documents should break out the fees employees are being charged.
Employees with questions can contact their company’s human resources department or the plan’s recordkeeper, the firm that manages 401(k) contributions and investment elections.
This story draws on original reporting from CBS News.