Ever wonder how much you're paying in fees in your employer-sponsored 401(k) plan? Do you even know that you are paying fees?
Most people don't. According to a recent AARP survey, seven of 10 plan participants didn't realize they were paying fees at all. In addition, 57 percent of small plan sponsors didn't know whether they or their plan participants paid management fees on their funds, according to a Government Accounting Office study.
Soon, you'll get a glimpse into what an employer-based retirement plan is costing you. Beginning Aug. 30, the U.S. Department of Labor will require plan sponsors to disclose how much plans charge to employees. Then on Nov. 15, employees will start receiving account statements spelling out just how much they actually paid the previous quarter.
Fees can vary quite a bit. The median fee is 0.78 percent, according to a Deloitte/Investment Company Institute study. But they can range from 0.2 percent on the low end to 5 percent on the high, says Brightscope, which tracks the performance of 401(k) plans.
If you work for a small business, you may be on the higher side of fees. "A small business tends not to have the necessary expertise to find out what's available in the marketplace," says David Loeper, chief executive officer of Wealthcare Capital Management and author of Stop the Retirement Rip-Off: How to Avoid Hidden Fees and Keep More of Your Money.
Different kinds of fees
There are two main types of fees that 401(k) plans charge. First are administrative fees, which cover the cost of running the plan with services like recordkeeping, accounting, legal and trustee. Usually these are charged on a per-employee basis because the cost of providing these services doesn't vary from one employee to the next, regardless of whether an employee has $1,000 or $100,000 invested in the plan. These usually run about $100 to $200 a year.
Next are investment fees, which go toward the cost of managing the actual investments, such as paying the fund manager and clerical staff. They also pay for investment-related expenses such as brokerage commissions and advertising. This is likely to be the largest component of your total 401(k) fees. In total, plans should be charging 1 percent total or less.
If you don't like what you see in your disclosure statements, you can stick to the lower-cost investment options in your plan. Ultimately, when you retire or change jobs, you'll have the opportunity to roll over your 401(k) assets into an individual retirement account, which will offer more investment options and greater transparency.
Learn more about rollovers.