One popular retirement savings tool is the 401(k). These employer-sponsored plans offer unique tax benefits, and your employer might match some or all of your contributions—but 401(k) fees come with the territory. That could eat into your savings and deplete your nest egg. Understanding your plan's fee structure can help you minimize or avoid 401(k) fees.
What Are 401(k) Fees?
Your plan may charge administrative fees and other 401(k) fees for managing your investments. A 401(k) is a relatively hands-off retirement account that allows you to invest in all sorts of assets. Investment options generally include a mix of:
If you don't select specific investments, your plan administrator will likely choose them for you based on your retirement timeline. Target-date funds, for example, will invest in a way that's appropriate for your age, then automatically rebalance to become more conservative as you approach retirement. Investing in your 401(k) can help grow your wealth over time, but it comes at a price. If left unchecked, 401(k) fees can take a bite out of your retirement savings.
Types of 401(k) Fees
Fees for 401(k)s generally fall into the following categories:
- Investment fees: These fees go toward managing the plan's investments. For example, if your 401(k) holds mutual funds or ETFs, you may have to cover their expense ratios. Investment fees are usually expressed as a percentage of plan assets and deducted from investment returns.
- Plan administration fees: These fees cover basic services like accounting, record keeping, legal services and more. Some 401(k)s also provide access to educational resources, retirement planning software and other extra perks. Administrative fees may be paid by the plan sponsor or the participant.
- Individual service fees: Some plans charge extra fees if participants use certain plan features, like taking out a 401(k) loan.
How to Check Your 401(k) Fees
Plan administrators are required to disclose all 401(k) fees. You can find this information in your plan's prospectus, which is updated annually. This is a legal document that provides important information for investors. You can also look at your 401(k) statement. Either way, fees for each investment should be clear. Look for the following keywords:
- Total asset-based fees
- Expense ratios
- Total operating expenses
If you're still unsure about your 401(k) fees, reach out to your plan administrator for clarification.
How to Lower Your 401(k) Fees
Your plan's administrative fees are out of your control, but you might be able to reduce or avoid other 401(k) fees.
- Look at the fees for each investment. This can help you understand which ones are costing you the most money.
- Review your investment strategy. Your investment approach should be guided by your age, risk tolerance and financial goals. A financial advisor can weigh in with personalized investment advice.
- Consider other investments within your 401(k) plan. Mixing up your asset allocation could result in lower fees. Just make sure your choices are aligned with your investment strategy.
Frequently Asked Questions
Your employer might pay some of your plan administration fees, but that isn't guaranteed. Total 401(k) costs usually fall on the employee, according to the Plan Sponsor Council of America. You can expect higher fees as plan assets increase. But employers have expenses of their own. Launching a 401(k) plan costs money, and they may have to cover some administrative costs going forward. They'll also incur costs if they offer an employer match.
You won't get a tax deduction for paying your 401(k) fees, but 401(k) contributions are another story. The money you put in is tax-deductible, which reduces your taxable income. That can indirectly lower your tax bill during your working years. But when you retire and begin drawing on your 401(k) for income, you'll be taxed on withdrawals.
Fees for a 401(k) can range anywhere from 0.85% to 1.09%, according to the American Society of Pension Professionals and Actuaries. The size of the plan and the amount of money invested can both affect costs. Investment fees typically range from 0.02% to 0.05%.
These fees can add up to a big expense and gradually chip away at your retirement savings—but there are ways to reduce or avoid 401(k) fees. Opting for assets with lower investment fees is one option, as long as that's in line with your long-term financial strategy. Avoiding additional services, like 401(k) loans, can also prevent additional fees.
The Bottom Line
It's difficult to avoid 401(k) fees, but adjusting your investment strategy could help you keep more money in your savings. Building your nest egg is a long-term process—and thanks to the power of compound interest, every dollar that's invested matters.
Experian can help you manage your credit before and during retirement. Our free credit monitoring tool makes it easy and will alert you whenever something new shows up on your credit report.