Retirement plan value: Are your 401(k) fees too high?

Do you and your clients understand how much is being paid in fees and what those fees are paying for? According to a recent study, the average 401(k) plan participant pays $600 per year in fees, which can eat into retirement savings. The average all-in cost of those fees is 0.45% of the total invested assets, according to a recent analysis of fee data from those who used the 401(k) Fee Analyzer tool.

Traditionally, there are three types of 401(k) plans fees: Investment fees, administrative fees, and individual service fees. But there are still a lot of different types of fees within those umbrellas and it’s not always clear which fees are what. Fees are charged at a plan level for the management and administration of a plan or are related to the investments made by employees within the plan.

Average fees for small plans (under $100 million in assets) were between 1.5% and 2%. Large plans often report 1% or less in fees. Here is a breakdown of different fees and how they affect you or your clients’ nest eggs.

401(k) investment fees

Usually the most costly fees, investment fees come from the cost of investment-related services levied by the funds in your 401(k) themselves. Depending on the mutual fund the plan is investing in (based on risk tolerance, age, and other factors), a fee is levied as a percentage of assets invested. Investment fees are almost exclusively paid by employees, though there are instances where an employer will pay some of the investment fee. Their fees are calculated based on what employees invest in their 401(k) accounts.

Some typical investment fees include Front-end load, Purchase fees, Back-end loads, 12b-1 fees, Investment management fees, and Account fees. It’s important to talk to your financial advisor or directly with a third-party administrator (like The Ryding Company) to get transparency around your investment fees.

401(k) plan administrative fees If your 401(k) is managed by a financial team or group of specialists, there will be administration fees. These fees are to cover general management and could include, legal and trustee services, record-keeping, accounting, and tax advice. The more services provided, the higher the fees will be.

In most cases admin fees are passed on to the employee as a flat fee (or as a percentage of assets). In some instances these fees could be covered by investment fees deducted from returns or charged separately against the employer or against the assets of the plan.

Individual Service Fees

In some cases a plan sponsor will pay for specific one-off services, such as distributing funds, processing a 401(k) loan, or processing a Qualified Domestic Relations Order.

Talk to your financial advisor or TPA

Speaking with an expert can be a major money saver. Financial advisors and TPAs are invaluable as you look into your retirement plan and try to understand your fees. They know the ins and outs of a 401(k) and can work with you to minimize unnecessary fees.

Reach out to our team and we’ll help you and your clients understand what they are paying for in their plan!

This information is provided as general guidance and may be affected by changes in law or regulation. It is not intended as accounting or legal advice. If you have questions please reach out to our team.