There are lots of compelling reasons to take advantage of your company’s 401(k).
The assets you accumulate by participating can help ensure a more comfortable retirement than you would otherwise have. At the same time, you should also be aware that it does cost something to participate, though the fees that apply vary from plan to plan. Some of these fees are subtracted from your account value before your return is calculated and others after the return is figured.
Some fees pay for managing and administering the 401(k) itself, while others are associated with specific investments and investment transactions within the plan. Here are some of the major 401(k) fees you need to be aware of:
Investment fees cover the cost of managing the plan’s investments. In general, they’re calculated as a percentage of the plan’s invested assets and are subtracted proportionately from your investment return, based on the value of your account, before the return is credited to your account.
The fact sheet or prospectus that you receive from your plan provider summarizes the fees associated with each of the plan’s investments, often identified as an expense ratio. You’ll find that the fees vary. For example, in the case of mutual funds, actively managed international funds tend to carry higher fees than domestic bond funds.
Some but not all of your investment alternatives may carry sales charges, which are subtracted when you authorize a transaction. If your plan offers a brokerage account alternative, sometimes called a brokerage window, commissions on your purchases and sales plus other fees that may apply will be subtracted as well.
Administration fees cover the cost of plan accounting, legal expenses, and sometimes recordkeeping. They may also cover the cost of online access to your account, educational materials, investment advice, and other plan services.
In some cases, your employer may pay the administrative fees directly. In others, they may be covered by the investment fees. And in still other instances, administration fees are paid out of plan assets either as a percentage of each participant’s account balance or as a flat fee charged against each account. If the amount is charged against your account, it will generally appear on your account statement.
If you have questions about how much you’re paying in 401(k) fees, you can review the investment fact sheet or prospectus for each of the plan’s investment options, available at enrollment or on your plan provider’s Web site. You can also contact your plan administrator, who can provide a summary plan description that may give you more information about the expenses associated with running the plan and how they’re paid.
The impact of fees
As an example, assume you have $25,000 in your 401(k) account, which averages an 8% annual return before fees are subtracted. If the account has an expense ratio of 0.5%— or 50 basis points — your account would grow to $232,303 over 30 years, even if you made no additional contributions. That’s because your actual rate of return after expenses are subtracted is 7.5%.
In comparison, if the account has an expense ratio of 1.5%— or 150 basis points — your account would grow to only $172,984 over the same period after fees are subtracted. That represents an actual rate of return of 6.5% and results in a difference of $59,319, or almost 26% less.
There are lots of compelling reasons to take advantage of your company’s