What Are 401(k) Fees?

What Are 401(k) Fees?

There are costs associated with managing a 401(k), both on the administrative side and the investment side. Your employer might choose to cover some of your plan's administration fees, but the majority of 401(k) fees fall on the employee. Being familiar with your plan's fee structure can help you better understand where your money is going and how you might be able to reduce these costs.

It's also worth noting that 401(k) fees are not tax deductible. However, your traditional 401(k) contributions are tax-deferred, meaning you won't pay taxes on contributions until you begin withdrawing money. This is one of several tax advantages to contributing to a 401(k). Just keep in mind that Roth 401(k)s are funded with after-tax dollars, so you won't get a tax break on those contributions—but you'll pay no taxes when you begin withdrawing the money in retirement.

As a refresher, a 401(k) is an employer-backed investment account that's designed specifically for retirement savings. It's typically funded through automatic payroll deductions, making it a little easier to save. Some employers will even match employee contributions. A 401(k) itself is not an investment. Instead, it's a retirement account that allows you to buy and sell various assets. They're generally used to invest in:

• Index funds
• Target-date funds
• Bonds
• Mutual funds
• Exchange-traded funds (ETFs)

How Much Are 401(k) Fees?

You can expect 401(k) fee costs to vary from one plan administrator to the next. The amount of money invested can also affect costs. According to joint research from the Investment Company Institute and financial information company BrightScope, the total plan cost for a 401(k) participant in 2021 was 0.49% of plan assets. While half a percent seems like a small fee, it can add up over time.

Example: You deposit $50,000 into a 401(k) with an average 7% annual return and a 0.50% fee. After 20 years and factoring in the fee, you'd earn approximately $176,182. If you didn't have the fee, you'd earn $193,484. So, the 0.50% fee costs you $17,302 over 20 years.

Learn more: Does an Employer Match Count Toward Your 401(k) Contribution Limit?

Types of 401(k) Fees

Every plan administrator is different but there are three main types of 401(k) fees.

How to Check Your 401(k) Fees

You can check your 401(k) fees by reviewing plan documents. The Department of Labor requires all 401(k) plan administrators to provide a participant fee disclosure once in any 14-month time period.

You might also find information about plan fees in your summary plan description. This document describes your rights, benefits and responsibilities as an investor. You should receive it within 90 days of joining the plan. If you're ever unsure of your plan's fee structure, reach out to your plan administrator directly for clarification.

How to Lower Your 401(k) Fees

While you can't do much about your 401(k)'s administrative fees, you might be able to reduce your investment fees by tweaking your investment strategy. For example, index funds and ETFs typically have lower fees than mutual funds. But this is something you'll want to do with a financial professional. Otherwise, you could be left with an asset allocation that doesn't support your risk tolerance and long-term investment goals. It's also wise to look at the big picture and weigh all investment fees against potential returns down the line.

Another way to minimize 401(k) fees is to avoid additional account services—like taking out a 401(k) loan—unless it's absolutely necessary.

The Bottom Line

If you have access to a workplace retirement plan, it could be a great way to save for your future—even if there are 401(k) fees. You can empower yourself as an investor by getting familiar with the fee structure and your investment options. From there, you can choose an investment strategy that feels right based on your age, goals and appetite for risk.