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  • Writer's pictureSamantha Diggs

A Complete Guide to Understanding 401k Fees

Updated: Nov 16, 2022

401(k)s are a common choice for company benefit plans for how they allow employers and employees to contribute towards retirement. However, these benefits come at a price in the way of 401(k) fees, which are needed for financial and third-party experts to create and manage such plans. The Employer is responsible to ensure the fees are reasonable, however, it is important employees understand all types of 401(k) fees involved to best manage and build these long-term financial accounts for their future. Let’s review the following 401(k) fees that employees should know and understand before discussing with their plan sponsor.

Types of 401(k) Fees

Investment Fees

Out of all 401(k) fees, members will probably pay the most for investment fees within their plans, as they cover the costs to manage the investments offered within their retirement funds. These fees cover the following charges to establish and maintain a 401(k):

  • Purchase—which limit the acceptable amount to buy shares like sales loads. Often paid to the fund’s holding company rather than the account seller, 401(k) purchase fees settle investment fund expenses tied to shares.

  • Exchanges—which are necessary for a plan sponsor to exchange shares between fund accounts without losing earnings.

  • Account—essentially keeping accounts active even when fund balances are below required minimum amounts with little to no contribution activity.

  • Sales Loads—which function as an account commission to the seller or broker who helps establish the 401(k) fund. These can be paid in two ways: 1) by a front-end purchase upon establishing the account, reducing the funds available for shares; or 2) the back-end or deferred purchase after selling fund shares.

  • Redemption—which come from sold 401(k) share profits and paid to the company rather than the seller, thus settling all expenses for account management and sale.

  • Management—wherein employees pay plan sponsors to manage their 401(k) accounts using part of their fund assets.

  • Distribution (12b-1)—these 401(k) fees cover marketing, fund shares, and broker charges which employees pay from their investment earnings as required by the Securities and Exchange Commission.

Overall, 401(k) investment fees can be anywhere from 0.03% to 2% of the dollars invested to purchase and/or sell the funds. The lower the payment, the more likely your assets you are investing in need minimum oversight by the investment manager to achieve an optimal gain towards retirement; on the other hand, higher 401(k) charges tends to me the shares require more upkeep by the investment manager on the account. Therefore, regular updates and meetings with plan sponsors should be prioritized for members to discuss investment fees, which can be found in a mutual fund prospectus or annual plan report.

Administrative Fees

Additionally, costs associated with properly maintaining a 401(k) Plan is the cost of an expert who can perform the required Administrative Duties for the plan. These fees may be paid for by the Plan Sponsor or they may be passed on to participants in the form of an account fee deduction or added into the investment fee discussed above as an additional cost. The services covered by this type of fee are as follows:

  • Record keeping

  • Accounting

  • Government Filings

  • Legal and trustee services

  • Nondiscrimination testing

  • Additional services ranging from access to customer service representatives to asset advisement

On average, 401(k) administration fees run between $100-$200 per participant depending on the plan in either direct or indirect forms. Direct fees can be paid by the plan sponsor or deducted from member accounts, while indirect fees raise 401(k) investment costs to lower returns. As such, employees have better knowledge of 401(k) administration charges with flat direct fees. Direct administration fees are deducted from your 401(k) assets, which must be reported on each participants quarterly benefit statement.

Individual Service Fees

Individual services fees are typically the least of 401(k) fees as they cover specific features offered that each participant may elect or not elect on an individual basis. Individual service 401(k) fees range anywhere around $20-$150 and are charged per-transaction to your account whenever features are selected. Such individual service features charged within a 401(k) include:

  • Taking a loan from your 401(k) account

  • Taking a Hardship from your 401(k) account

  • Taking a Distribution from your account due to termination, death or disability

  • Taking a Required Minimum Distribution from your account

  • Seeking special financial advice services

  • Utilizing a Brokerage Account window if offered within your plan

While individual 401(k) fees cost the least within retirement plans, attributing certain features on top of current payments can eventually add up against potential earnings. These fees range in pricing between 0.2-1% of employee retirement assets depending on the plan’s provider, total number of participants, and limitations set by the employer. Therefore, its important members request a list of each individual service item charged to ensure no oversight or overcharging occurs. Employees can best protect their assets from being overcharged by checking for individual fees in your summary plan description or the required annual 404(a)(5) fee disclosure notice.

Manage 401(k) Fees with RCPSI

Despite the importance of checking and protecting monetary assets for retirement, few employees check their 401(k) fees with providers, thus overlooking charges and losing money towards retirement without even knowing. However, after recent years of economic uncertainty, it's more valuable than ever to evaluate earnings to save for retirement when income is limited. As providers charge 401(k) fees daily, taking control to learn about investment, administrative, and individual fees will help workers earn the best possible profits. These fees aren’t hidden, but you need to be aware of them, understand them and watch your account for them. According to the U.S. Department of Labor, all providers and sponsors must disclose 401(k) fees and their location within plans upon enrollment to reduce liability. Thus, employees unaware of certain fees must take responsibility and review these charges with providers to discuss or adjust accounts accordingly for the best potential outcome. A great place to start reviewing all fee responsibilities is in the annually updated prospectus given upon enrollment, which clearly shows all 401(k) fees within the categories of Asset-Based Fees, Total Operating Expenses As a %, and Expense Ratios as well as in the Annual Fee Disclosure Notice.

No matter if you’re an employee or plan sponsor, it’s paramount to understand all 401(k) fees needed from for financial and third-party experts to develop, manage and maintain the proper retirement plan. Learning about these expenses and compliance regulations can be daunting alone; thankfully, RCPSI is here to help and relieve such stress from you. To learn more about 401(k) retirement plan regulations or receive professional expert guidance, contact RCPSI today!

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