Most people have never seen a bill for their 401(k). That is why the fees feel invisible, and why they get so little attention until someone notices the balance is growing slower than it should.
The U.S. Department of Labor puts the cost in one example. Take $25,000 in a 401(k), 35 years to retirement, no more contributions, and a 7% yearly return. With fees of 0.5% the account grows to about $227,000. With fees of 1.5% it grows to about $163,000. One point of difference, 28% less money.
The three kinds of fees
The same Labor Department guide sorts them into three groups.
Plan administration fees. Recordkeeping, accounting, the website, the statements. Sometimes the employer pays these. Sometimes they are split among everyone’s accounts.
Investment fees. The yearly cost of each fund you hold, shown as the expense ratio. This is usually the biggest piece, and it comes out of the fund’s return before you ever see it.
Individual service fees. Charges for things you choose, such as taking a loan from the plan.
Why yours might be high
Usually one of three reasons.
A small plan. A company with forty employees has less bargaining power than one with forty thousand, so the fixed costs are spread over fewer people.
Expensive funds on the menu. Some plans are filled with actively managed funds that cost many times more than an index fund doing a similar job.
Costs passed to you. Some employers pay the administration bill. Others pass it through to the accounts.
Where to find your number
You are entitled to a fee disclosure from your plan, normally once a year. It often arrives as an email you did not open. Look in the documents section of your 401(k) website for a notice about fees, or ask HR for “the annual participant fee disclosure.”
On it, find the table of funds and the column for expense ratio. Then find any line for administrative fees charged to your account.
What you can control
Which funds you pick. This is the big one. If the menu has an index fund or a low-cost target date fund, compare its expense ratio with what you hold now.
Whether you still get the match. Never give up employer matching money to avoid fees. A match is an instant return that no fee difference will erase.
What happens to old 401(k)s. Money left at a former employer can usually be moved to a new employer’s plan or to an IRA. Compare the fees on both sides before you move it.
Asking. Employers have a legal duty to watch plan costs. A polite question to HR, “has the plan compared its fees lately?”, is fair, and sometimes it starts a review.
You cannot choose your plan. You can choose your funds.
What you cannot control
The plan’s provider and the menu itself. If every option is expensive, contribute enough to get the full match, then weigh other accounts for the rest.
Related questions: what a good expense ratio is, should I roll my 401(k) into an IRA, are target date funds good and mutual fund loads and 12b-1 fees.
One question for this week: what is the expense ratio of the fund holding most of your 401(k)? It takes five minutes to find, and most people never look.
As always, if you want to talk any of this through, the door is open. Genti