401(k) Plan Fees - Overview
By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
Employees with 401(k) accounts often pay fees. These fees cover the cost of running the plan as well as activity that takes place in the employee’s account. If you’re part of a retirement plan, you should know how 401(k) account fees work and what they pay for.
Participants in 401(k) plans (or employees who invest in the plan) often help pay for the plan. Retirement plan accounts are often more expensive than accounts you open on your own. Employers may pay some of the costs in an effort to provide an attractive and competitive employee benefit, but some of the burden is bound to fall on employees.
Some of the most common 401(k) account fees are described below. Depending on your plan, you may pay some or all of these fees:
- Transaction fees - charged when something happens with your 401(k) account
- Flat fees - regular, recurring charges that must be paid to maintain the plan
- Asset based fees - deducted from the value of your assets in the plan. These deductions may or may not be visible and transparent to you. They often cover investment management and other services.
More detail on these account fees is below. Note that every plan is different. Whether or not you pay these fees depends on the specifics of your company, your 401(k) plan’s service providers, and choices made by your employer.
401(k) Account Transaction Fees
Transaction fees are charged to your account when you request certain transactions or use certain services. If you take a loan or distribution from the 401(k) plan, you may be charged a fee to help cover the administrative and operational costs of processing the transaction. You may also be charged a fee when changing investments in the plan. Read your plan’s disclosures for details on when fees are charged for switching investments.
A few examples of 401(k) account fees include instances when you:
- Take out a loan
- Take a distribution (including hardship, termination, or QDRO)
- Change or choose certain investments
- Use premium investment advice services
Flat Fees in 401(k) Accounts
Even if you don’t incur any transaction fees, you may pay fees in your 401(k) account. Plan recordkeeping and administration is often charged as a flat fee (plus a per-head fee), and these charges may be passed on to you. These fees most likely don’t change much from year to year.
If you’ve never seen these fees in your 401(k) account, it doesn’t mean your plan is free. Either your employer foots the bill, or recordkeeping and administration are paid for out of plan assets (and you just don’t see the money flow).
Asset Based Fees in 401(k) Accounts
Asset based fees are charged in most 401(k) accounts. However, they may be the hardest fees to identify. You pay asset based fees out of your savings -- your assets -- in the plan. They are generally expressed as a percentage of your total account value.
Asset based fees are typically paid in one or more of the forms below:
- Asset based fees are typically paid in one or more of the forms below:
- Mutual fund expenses (the expense ratio)
- Advisory fees
- Insurance company fees (M&E, asset charge, contract charges, and so on)
With new 401(k) fee disclosure rules, you should be able to find out how much you pay with much less digging. Retirement plan service providers increasingly have to disclose how much they charge and where the money flows. Participants (or employees who save money in the plan but do not make decisions about how the plan functions) may not have all of these details, but employers should have the information as of January 1st 2012.