Understanding 401K Fees
Building a retirement fund through a 401K plan is an easy and effective way to increase savings. You can enjoy automatic withdrawals, tax benefits, and often matching dollars through your employer. However, high fees reduce the rate of return and chip away at earnings. Each quarter, the law requires fund administrators to send a statement which includes the fund fees and expenses. Understanding the cost of your 401K can help you maximize the rate of return. There are three different fees impacting your account.
Administration fees pay a third-party administrator to operate the 401K. Companies can charge a set fee paid by the employer or as a percentage, charged against the assets in the account, which reduces gains. Administration fees are not included in the annual fee disclosures because they are a part of the administrator billing sent directly to the employer.
Investment fees pay for the management of the individual investment and comprise the largest fees within a 401K. Mutual funds, list the fee as an expense ratio as a percentage of the assets. Actively managed funds have higher fees than index funds and can range from below 1% to over 2%. While it sounds like a small percentage, it can reduce returns by as much as 30% over the life of the investment. Some funds also charge separate marketing fees or other costs, which increase the price of the fund.
Service fees cover the cost of features offered by the 401K. Common costs include the administration of loans or advising services.
The size of the account and overall size of the 401K directly impacts 401K fees. Choosing less expensive funds can save money on investment fees, but cheaper is not always better. When changing jobs, compare costs before moving your 401K to the new employer or an IRA.