[Editor's Note: Today's guest post was submitted by Nicolle Willson, JD, CFP®, C(K)P®, the Head of Retirement Consulting at Guideline, a company that specializes in 401(k) plans for small businesses, and a company that has advertised with us from time to time. Today we're going to talk about 401(k) fees. Fees, like taxes, create a drag on returns, especially over long periods of time. The 401(k) structure protects you from taxes as your money grows, but not fees. Make sure you pay attention to all fees, whether set-up fees, flat fees or AUM fees. Like when using a financial advisor, do the math each year to know how much you're paying and remember that AUM fees become more significant with larger accounts.]
We all know we should be saving for retirement. There’s no guarantee that safety nets like Social Security will last forever, and even if they do, they’re not enough for most Americans to live on.
But what savers often don’t know is that putting money in a 401(k) account isn’t necessarily free. Sure, we all assume employers pay something, but participants? One study found that over a third of account holders believed they didn’t owe fees at all. You can’t necessarily blame them—401(k) providers rarely bring up those hidden costs in fees in their employee onboarding materials.We’re not talking about a few cents here or there. Over a forty-year career, you can lose out on hundreds of thousands of dollars thanks to the way 401(k) provider fees work.
How 401(k) Fees Work
We’ve mentioned “providers”, but operating a retirement plan takes behind-the-scenes work from recordkeepers, investment managers, plan administrators, and others so things run smoothly.
The Department of Labor divides retirement fees into three categories. Each of these types of fees can be charged to either the plan sponsor (your employer) and the plan participants (you), or both.
- Investment Fees
- Administration Fees
- Individual Service Fees
Investment Fees
Investment fees are exactly what they sound like. These serve as commission for the investment managers who invest your 401(k) account funds on your behalf. These fees are usually charged as a percentage of assets under management, and typically make up the lion’s share of your costs. To add insult to injury, you might also be charged a 12b-1 fee, which is often embedded in the investment fee. These compensate the marketing and salespeople responsible for attracting more investors into your mutual fund, which (in theory) means bigger investment earnings for you. In 2020, you really shouldn’t be paying these—reconsider your options if you are.
Administration Fees
Second, administration fees pay for all the administrative, recordkeeping, and compliance work that keep your practice’s 401(k) plan up and running. We’ll give providers a pass here since retirement plans are subject to some of investing’s most stringent federal and state regulations. Like investment fees, these are charged as a percentage of assets, or sometimes as a flat fee.
Individual Service Fees
Then there are individual service fees. Basically, a catch-all category for rollovers, distributions, and other one-off services that providers charge extra for. Rules might vary depending on the specific service, but most of these are flat fees.
What should you expect to pay in each of these areas? Different 401(k) providers will distribute fees in various ways between investment fees and administration fees. To know if you’re getting a good deal, we prefer to look at everything together with another metric—the expense ratio of a 401(k) plan.
Know Your Expense Ratio
You know the fees. And given all the time you’ve spent investing, you might even be resigned to them. Nothing’s free, and in the case of saving for retirement, no good deed goes unpunished.
But whether you’re a plan sponsor or enrolled in your practice’s plan, there are ways to do right by your employees and your wallet. First of all, find out what your plan’s “total expense ratio” is.
Your expense ratio is simply your plan’s total fees relative to assets held—meaning it’s a reliable measure of whether you’re being ripped off (or not). If you have $100,000 in a 401(k) account, a 1% expense ratio means you’ll pay $1,000 in fees. According to the 401(k) Book of Averages (20th edition, updated in 2019), the average 25-participant small business plan, with $250,000 in assets has a 1.68% expense ratio.
Remember when we said 401(k) fees could cost you hundreds of thousands?
Blame compound interest, the same thing that makes putting money aside in a 401(k) account so smart to begin with. Year-over-year, retirement fees take away the money you could be investing out of the equation. That $1,000 from earlier? You’ll see it grow slower and throughout your career, the news gets worse and worse—a bigger retirement portfolio means more fees.
Guideline, a low-fee 401(k) provider, ran the numbers to see just how much Americans lose out to these fees. If someone puts aside $5,750 per year over 40 years, the difference between having a 1.68% and 0.067%—the average of Guideline’s managed portfolios—expense ratio comes out to over $494,000. That math assumes a 7.6% annual return, based on the S&P 500’s historical performance. If you max out your 401(k) account (as of 2020, $57,000) the losses are even greater.
Other Costs to Avoid
Turnover rates in healthcare are on the rise, and not just because of COVID-19 or layoffs. Burnout among doctors remains high (WCI wrote about this a few weeks ago) and workers, in general, are just moving around a lot more. Point is, there’s a good chance many of us have a few retirement accounts to our names.
If that’s the case, consider consolidating those into the account with the lowest expense ratio. Remember, you’re paying fees on each of these accounts. In other words, if you have three accounts with lousy expense ratios, that means you’re being ripped in three different accounts.
One last thing—remember those service fees we mentioned? Those one-time transaction fees can add up for both individuals and plan sponsors. Ask your current provider to provide you with a schedule of what their services fees are.
The Bottom Line on 401(k) Fees
A lot of work goes into keeping 401(k) plans up and running and compliant, so they won’t ever be 100% cost-free. But what you can do is be mindful of what those costs are—whether you’re a plan sponsor or participant.
Take the time to review those quarterly statements, summary annual reports, and fee disclosures your plan provider sends along. At the very least, give your provider a call and ask what your expense ratio is if it’s not spelled out on paper. And if you’re shopping for plans, consider some of the more affordable, transparent options like Guideline—which charges employers a flat fee, and participants individual fees for transactions (like distributions and loans) but no added investment fees.
Bottom line? As is always the mantra at WCI, know what you’re paying for. Don’t let fees like these get in the way of a secure, comfortable retirement. You’ve earned it.
How have you reduced 401(k) fees? What advice do you have for someone with a crummy 401(k)? Sound off below!
For good advice at a fair price see WCI's recommended Small Practice Retirement Plan Providers!
Isn’t there some rule set by some govt acronym that says that 401k plans must offer low cost funds? I think I won a settlement from my former employer from a class action lawsuit regarding this. I never saw a dime from it though – It was going to be like 10 bucks, so I didn’t really follow up on it.
No, but your employer has a fiduciary duty to you, which includes not offering crap investments in the 401(k).
Make sure to look at your 401 account statements once you leave an organization. You might be surprised to find that your fees are different than the current employees.
Year ago I consolidated several 401K accounts into just ONE at Vanguard and never looked back. Their RMD program makes it easy to manage.
We switched from Vanguard Simple IRA to Guideline recently and am loving it. It integrates well with QB and was so easy to set up. Hoping this is a good long term solution.
Is it possible that one’s employer could be pocketing some of the fees from the employees’ 401Ks?
Our employer switched to Transamerica for our 401K and have set TAG resources as the middleman.
The Transamerica 401K lists a lot of fees, and when I called to ask what they were, they could not explain them.
Our CEO has been pushing the 401K very hard, in a way he never has before when we were with pervious 401K companies (Principal and Voya)
Ugghhh. Transamerica. Uggghhh. Principal and Voya. None of that sounds like a good sign to me, but without more details it’s hard to say. Better pay close attention to your fees and the ERs on those funds. Maybe you can sue your employer like what happened with Oye Beltalowda above for violation of their fiduciary duty.
I’d be too scared to do that…..I work in a very toxic work environment.
Can I sue as an anonymous employee? What type of lawyer does that?
This would be a good topic for a post.
Another question:
My employer still has our old 401K at Principal……I would like to move it elsewhere as this 401K has high fees and has not grown as much as it should have. But my employer has not closed it so I am “stuck” with it there. I initially thought this was out of laziness, but now I wonder if they (the employer) are collecting some of the fees.
Does anyone know any other ways to move it out? Also, which solo401K places would accept this 401k Rollover…..TD Ameritrade where I currently have my solo 401k does not accept it as they say an old emploer 401k is different than a solo 401K
Thanks!
If the plan doesn’t allow in-service rollovers (most don’t) you’re stuck there until you quit or are fired. It’s unlikely the employer is getting the fees, but they also aren’t paying them, you are.
If you can roll it over, most solo 401(k) places (including Vanguard which doesn’t take IRA rollovers) would take it. Surprised TD Ameritrade doesn’t as their competition all does.
https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
I’m with Prudential for my 401k. I have an annual fee for my Vanguard Target retirement Fund (0.09%) and an Administrative Asset Based Participant Fee (0.07%). No other fees that I can find (unless I take out a loan, get divorced, etc).
So my total expense ratio would be 0.16%. (Correct me if I’m wrong)
This seems pretty good to me on the surface. Can others share their expense ratios?
Yea, that looks pretty reasonable.
We’re putting together a 401(k) for 2021 since we have WCI employees now. The company pays all the fees and the expense ratios are all less than 10 basis points. So it’s possible to offer a VERY good 401(k), just lots of employers either don’t know that or they don’t do it.
Would you be willing to share who your TPA, record keeper, and platform is that you’re using?
Big article coming out later this week on the new WCI 401k.
This was a well-reasoned guest post by Nicolle Willson regarding 401k fees. And while she made a great point, she did not mention the potential increase in returns on managed 401k accounts which from my research with Fidelity amount to 3-5% more in a downturn (this year for example) and 6-8% more in an upswing over my non-professionally managed portfolio. In her example of a $250k account, this would more than offset an avg. 1.68% expense ratio.
If you are tracking managed 401(k) account funds that are beating the appropriate corresponding index averages by 5% in good and bad markets over a 15 to 20 year period – Then you should buy those index funds and remortgage your house and borrow every penny you can from everyone you know to buy those same funds. And then hope that the management doesn’t change.
Please share the fund names with us!
Exactly. Someone has likely sold Dr. Vance a bill of goods, gotten very lucky, or really should be running a hedge fund instead of his 401k.
Both your responses are well-taken (actually got a good “self-awaring” laugh out of it). Seems I need to get back to some basics of portfolio mgt. WCI, why don’t you offer this service for a fee (monthly/annual) to do the entire financial planning/implementation for those of us who (obviously) need the help, aren’t savvy enough, or just don’t have the wherewithal to “specialize” in finance mgt.
I prefer to teach thousands rather than directly help a few dozen, but here are some people who do that for a fair price:
https://www.whitecoatinvestor.com/financial-advisors/
I am an employer (dentist) with about 15 employees on the 401k plan. My partner set up our 401k plan before I joined (over 5 years ago). I don’t know where to go to discover total fees and who pays for them? Can I just call our plan administrator and ask for all the fees? Is it written explicitly in our annual disclosures? Any other ideas?
Sure. Start by asking for the plan documents, the info is probably in there. You as the employer are required to give them to any employee who asks for them.
My employer runs their retirement account through John Hancock. Their 408b2 disclosure shows a fee of 0.97% on top of fund expense ratios. Would you call this high? Insanely high? Or we should sue tomorrow high?
Also, here’s a curious observation maybe someone could explain. The total fee is always 0.97% but this is divided differently depending on the fund. For example:
American Century Heritage: ER 0.66 plus fees
0.35 = Revenue from underlying fund
0.62 = Plan services
(0.35 + 0.62 = 0.97% fee)
DFA Emerging Markets: ER 0.51 plus fees
0.00 = Revenue from underlying fund
0.97 = Plan services
(0 + 0.97 = 0.97% fee)
Thanks in advane!!
Whether I’d actually sue, I don’t know. But I would certainly remind the employer that someone else could successfully sue them for a fee like that.
It’s all just smoke and mirrors as far as how the fee is made up.