Your 401(k) Isn't Free. Here's How to Figure out How Much You're Paying in Fees

Do you know how much your 401(k) costs? If your answer to that question is, “what cost?” then you’re not alone.

More than four in 10 people say they don’t know how much their workplace retirement plan costs, according to a recent study from financial research firm Hearts & Wallets. Another 16% of people think their plan is free.

While it can be difficult to suss out what those fees are, you have a legal right to know. And since they’re your retirement dollars, you should be aware of what fees you’re paying and how they can affect your ability to save. That's because fees eat into your investment returns, and the higher they are, the bigger their bite. “Half a percent, a quarter of a percent, over time really does start to add up,” says Scott G. Moulton, partner at Capital Management Group in Milford, Connecticut.

“If you're working in the company [for] 10, 15, 20 years, and throughout that timeframe, the expenses are just higher than they really needed to be, that could have an adverse impact on your retirement nest egg,” Moulton says.

It’s your employer’s responsibility to keep plan fees in check. Employers are regularly hit with class-action lawsuits for charging excessive retirement plan fees. Here's what to know.

What are 401(k) fees for, anyway?

There are several types of fees. Investment fees are for managing the money in your 401(k); they're typically taken as a percentage of your assets in each fund, and they can range from the low teens to 100 basis points, meaning a fraction of a percent, up to about 1% of your assets. Record-keeping and administrative fees pay for plan management and are generally negotiated between your employer and the plan provider. If you work at a large employer, they could cost anywhere up to 20 basis points (0.2%), according to experts at Fidelity Investments. In some cases your employer may pick up these costs.

It's difficult to compare fees between plans, which vary widely in the extra services they provide. "If someone works for a company that on a monthly basis they're getting live, custom education [from their plan provider]... there's going to be a higher cost associated with that than a company that has zero live interaction at all," Moulton says. In that case, higher fees make sense and may be worth it.

Fees have steadily decreased in the past few years, with the latest 401k Averages Book showing the average total fee at a small company went down from 1.23% to 1.20% this year. Fees at larger companies, on the other hand, went from 0.91% to 0.90%.

That’s right— if you work at a mom-and-pop shop you’re probably paying more in retirement plan fees than your friend who works at a huge Fortune 500 firm. “The more assets in that plan, typically, [the employer] can negotiate a lower fee,” Kristen Ventre, Senior Vice President Retirement Plan Services at Girard in Allentown, Pennsylvania says.

How can I find out how much I’m paying in retirement plan fees?

Since 2012, the Department of Labor has required investors to be provided with an annual disclosure of the fees they pay for their retirement plans. However, it can still be quite tricky to find out how much you’re paying in fees, Ventre says.

To figure that out, first head to your plan website and look for a document called the participant fee disclosure, or Form 404(a)(5) DOL. That form will show the expense ratios for all the funds your plan offers as well as the performance of those funds.

“If you can’t find it on the website, call and ask them for a copy and to explain it to you,” says Ventre. You should feel empowered to ask the plan manager questions or go to your HR department to ask for help.

What should you do if your fees are really high?

In most cases, the fees will be under 1%, which is also listed as 100 basis points, Ventre says. “If you see a mutual fund expense ratio of 2% or 200 basis points, that to me is a bit of an outlier.” In that case, go to your HR department and ask how they manage the plan or when the last time they reviewed it was.

You can't shop around in the case of your 401(k), since you're captive to what your employer offers. But you can choose to invest in different mutual funds within your retirement account if that would help you save on fees and increase your returns.

Another option if your fees are high is to contribute just enough to your 401(k) to meet your company match and invest the rest of your money on your own into an IRA or a health savings account (HSA). Fees are also a consideration after you leave your employer, when you're deciding whether to leave your 401(k) where it is or roll it over into a new account.

But know that saving something is still better than saving nothing, and saving through any employer sponsored plan is still one of the best ways to automate this hefty task. When you save through an employer-sponsored plan, “you're doing what every investor really should be doing, which is paying yourself first,” Moulton says.

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