When it comes to selecting investments in an employer-sponsored retirement account, such as a 401(k), it’s important to consider plan fees. While fees and expenses aren’t the only consideration when selecting investments, they can have a big impact on your nest egg over time, which can in turn impact your income and lifestyle in retirement.
What are 401(k) plan fees?
There are two main types of fees to consider within an employer-sponsored plan like a 401(k): administrative fees and investment fees. Keep in mind: Your employer (the plan sponsor) is in charge of your retirement plan, meaning they tend to select an administrator (firms like Empower, Principal, Alight, and more) to run the plan. The plan sponsor also selects which investments are available within the plan.
Administrative fees cover the day-to-day operation of a 401(k), including recordkeeping, accounting, legal and trustee services, and so on. These steps are required by regulators. Sometimes, employers cover these expenses, but sometimes fees are covered by plan participants.
If plan participants pay for these fees, it may be a flat rate, or it may be a percentage of the assets you have with the plan. How your retirement plan handles administrative expenses, and who pays them (including at what rate), should be listed in your plan’s fee disclosure.
Investment fees refer to the fees charged by the individual investments within a plan. Most retirement plans feature mutual funds and ETFs, which often carry management fees. Rules exist to try and ensure plan participants receive the best deal on fees—for instance, if a mutual fund has several classes of shares, your plan sponsor must include the cheapest share class.
Investment fees are charged as a percentage of the funds’ assets, meaning they can eat away at returns over time (or increase losses in a down year). Your plan’s disclosure material should describe any shareholder transaction fees. You can also access the prospectus of any fund offered within your retirement plan for a more detailed breakdown of expenses.
Why do 401(k) fees matter?
At the most basic level, any fees charged eat away at potential returns. The bigger the fee, the greater the impact. The following table demonstrates how varying levels of fees and expenses can impact the growth of a hypothetical 401(k) plan account after 35 years, assuming a $25,000 starting balance, 7% annual return before expenses and fees, and no additional contributions.
How do you learn about your plan’s fees?
Remember that fees and expenses are just one factor to consider when choosing an investment for your 401(k) plan account. You’ll also need to consider your investment objectives and risk tolerance, then look at which investments might be suitable. Finally, it’s important to evaluate a fund’s investment performance in relation to the fees charged, keeping in mind that past performance does not predict future results.
However, all things being equal, minimizing the fees and expenses you pay to your 401(k) plan may help you increase your retirement nest egg, so be informed and review all your options carefully. Be sure to check your plan’s fee disclosure information. Or, if you need help selecting the investments within your 401(k), or evaluating additional options for retirement saving, contact a Bogart Wealth Advisor.
