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You could end up paying more than $100,000 in 401(k) fees

Here's how to keep the costs to a minimum.

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If you love saving money, you probably know exactly where every dollar in your budget goes—including retirement contributions. But you might forget to count the extra costs involved when you sign up for a company-sponsored plan.

About 95% of 401(k) participants pay fees that eat into their portfolio value over time, according to TD Ameritrade. A 2018 survey by the investment brokerage found that just 27% of workers know how much they pay in 401(k) fees, and 37% don’t realize they pay fees at all.

If you have a 401(k), here’s what to know about account fees and how to minimize them, so you can focus on growing your nest egg.

What’s a 401(k) fee?

Let’s start with the basics. A 401(k) is a retirement account that some companies offer to help workers save for their golden years by partnering with brokerages—a “plan provider” such as Fidelity or Vanguard—to set up and maintain the accounts.

Every time you get paid, you can elect to have your company send a set percentage of your paycheck to the account. You choose the percentage, so long as you stay within the annual 401(k) contribution dollar limits. The employer might also kick in its own contribution, known as a “match,” as part of your benefits package. The plan provider invests the money, and your money usually grows over time.

Most 401(k) plans charge fees, which is “any costs you pay to participate in your employer’s retirement plan,” says Justin Pritchard, a certified financial planner. “The fees come out of your retirement savings, so you ultimately end up with less money after paying fees.”

These fees vary based on several factors, but generally, “bigger plans tend to have the lowest fees, especially with traditional 401(k) providers like mutual fund companies and insurers,” Pritchard says. “ ‘Big’ can refer to the total assets in the plan, the average account balance among employees, or other factors.”

“Bigger plans tend to have the lowest fees, especially with traditional 401(k) providers like mutual fund companies and insurers.”

Employees at small companies tend to pay significantly higher fees compared to large corporations. Across all plans, fees range from 0.5% to 2% of the individual’s total invested assets, with the average around 1%, according to the Center for American Progress. While 1% might not sound like much, these fees can seriously add up. A typical American worker who earns a median salary and starts investing in their retirement at age 25 will pay about $138,336 in 401(k) fees over their lifetime.

What type of fees might you pay?

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When you check in on your retirement account, you may notice investment fees, record-keeping fees, and other 401(k) fees.

Here are some common fees that your plan provider or employer might charge:

Investment fees

These are fees you pay in a mutual fund or exchange traded fund (ETF), and they’re usually expressed as an expense ratio, such as 0.50%. In this instance, a brokerage would charge you $5 for every $1,000 you have invested. Your annual 404(a)(5) disclosure should explain what you pay on a percentage basis and for each $1,000 invested, Pritchard says.

Record-keeping or administration fees

The plan’s record-keeper may charge daily fees to each participant as a flat rate or a small percentage of assets. “You don’t actually see the charges in many cases,” Pritchard says, “but they impact your growth and are reflected in your account balance.”

A record-keeper works behind the scenes to manage details of the plan, such as participant activity, employer contributions, and investment gains and losses. They’ll also process requests, such as taking out 401(k) loans, and provide investment options for participants. Administrative fees, which help cover accounting, compliance, and other services, might also be baked in.

Consultant fees

A business may hire a financial adviser to manage its 401(k) plan and maximize returns. While the extra work can help grow the assets in the plan, the employees might foot the consultant’s bill.

Transaction fees

Some companies allow employees to do things like take out a 401(k) loan or sell investments. These transactions might trigger fees, which will be added to your costs.

Revenue sharing

While not exactly a fee, this is a method of charging fees and distributing the proceeds to different service providers. For example, let’s say you invest in a mutual fund with an expense ratio of 1.50%. “That cost might get split up and shared among different service providers like your plan’s record-keeper, a financial adviser, and the investment company that manages your assets,” Pritchard says.

If you work for a nonprofit organization and have a 403(b) retirement plan, you might pay some of these fees, too. Check your policy documents to find out—and call your plan provider if you have questions.

How to minimize 401(k) fees

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Any 401(k) fees you pay eat into your retirement funds—there are a few options to cut down on the costs.

You’ll probably have to pay some type of 401(k) fees—after all, you need people to keep your account running—but there are some ways to save money:

  • Read your plan documents. Your 401(k) administrator must disclose all the fees you pay on your quarterly or annual statements. The fees might not be itemized, but look for labels like “expense ratio,” “total asset-based fees,” and “total operating expenses as a %.” If you have questions, contact your plan provider to explain the charges.

  • Talk with your HR department. According to the Department of Labor, your company must make sure you’re paying “reasonable” 401(k) plan fees. “ ‘Reasonable’ is not defined anywhere,” Pritchard says, “but that doesn’t mean your employer can be asleep at the wheel when it comes to fees.” Your company should regularly shop around for plan providers to make sure you’re getting the best deal.

  • Start a 401(k) employee committee. You can also talk with your human resources department about launching a 401(k) employee committee. This can be as casual or informal as you’d like. The committee may help the company evaluate and hire service providers, review investment options, and go over the fee structure on an annual basis.

  • Consider alternatives. If your plan has high fees, consider contributing enough to get the match and then looking at retirement plans outside of the 401(k). “For example, you might be able to save in a traditional or Roth IRA,” Pritchard says. These accounts come with their share of fees, too, but shopping around may cut down on costs and still help you reach your retirement goals.

  • Look for in-service distributions. If your plan allows these, you may be able to move funds from the 401(k) to an IRA. “That way, you get to choose how much you pay in your IRA instead of being stuck with your employer’s offering,” Pritchard says.

  • Ask your employer about low-fee fund options. The plan might offer low-cost investment options. Just remember that it “can be counterproductive if it means avoiding exposure to investments that might benefit you over the long run,” Pritchard says.

Bottom line? You might be paying fees to save for retirement, but it’s probably better than forgoing the plan altogether. “You won’t work for the same company forever, and you can eventually move assets to a less expensive IRA,” Pritchard says. “If you avoid saving because of high fees, you'll end up with nothing.”

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