You are probably already figuring out how much money to contribute to your 401(k) plan every year. More than likely, you also spend time learning how best to invest the money. One thing many people neglect, however, is 401(k) fees. Small fee changes each year can make big differences in the performance of your plan over the course of many years. In this article, we’ll look at 401(k) fees and how you can determine how much your 401(k) is costing you.
How Much Do 401(k) Fees Matter?
Though it may sound like splitting hairs, even small differences in fees can matter. Every fee you are paying in connection with your 401(k) plan can have an impact on your investment performance over the long term. The difference of just half a percentage point can be incredibly significant.
For example, let’s say you currently have $100,000 in your 401(k) plan, and you’re 30 years away from retirement. Lowering your fees by 0.50% can improve your investment performance from, say, 7.50% to 8.00% effectively. Over three decades, that will make a shocking difference:
-- If you continue with your current fee structure, and accept the 7.50% return, your $100,000 401(k) plan will grow to $875,495 after 30 years.
-- If you lower the annual fees by 0.50%, and earn 8.00% on your $100,000 401(k) plan, the plan will grow to $1,006,246 after 30 years.
That's a difference of over $130,000, just for lowering your fees by half a percent! The advantage will be even more impressive if you can reduce fees by a full percentage point or more.
Now you can see why 401(k) fees really do matter.
Types of Fees Typically Found in a 401(k) Plan
It’s important to have a good idea of the fees that may be associated with your 401(k) plan. Since there are potentially quite a few, it can complicate the job of calculating exactly how much you are paying each year. In turn, this makes it hard to know how much that reduces the rate of return on your plan.
Here are the more common fees:
Plan Administrative Fees. Since 401(k) plans are typically administered by third-party trustees, there is often an administrative fee. This is a fee that is charged by the trustee to pay for day-to-day expenses, such as accounting, compliance, and record-keeping. The fee is often small, perhaps as low as $50 (though they can be much higher), and is sometimes paid by the employer. If it isn't, it will be deducted from your plan.
Investment advisory fees. If the plan is managed by an investment advisor, there might be an investment advisory fee. It is typically a percentage of the total portfolio value, say 1%. Of course, this can vary. Like plan administrative fees, investment advisory fees are annual charges.
Commissions. These typically don’t apply if the 401(k) plan is held with a mutual fund family. But if the account is held within an investment brokerage, there will usually be a commission charge on any trades involving stocks, exchange-traded funds, or even mutual funds.
The commission is usually a flat fee, ranging from $5 to $10 per trade, whether buying or selling a security for fund position. Though commissions may not be a significant fee on a large account that is traded infrequently, they can become a major expense if you are an active trader.
Mutual fund loads. These are something akin to commissions, however, they are paid to a mutual fund. They are a percentage of the mutual fund position you are buying or selling, and generally range between 1% and 3%. Fund loads can be charged on purchase (“front-end load”), or on the sale of the mutual fund position (“back-end load”, but also referred to as either “redemption fees” or “deferred sales charges”). And on some mutual funds, they can be charged at both ends, such as 1% at purchase and 1% on sale.
Loads are not typically charged on exchange-traded funds (ETFs), so you might favor these investments if they are included in your plan.
Learn More About Exchange-Traded Funds (EFTs)
12(b)-1 fees. These are fees that are charged within a mutual fund. You'll never actually see the fees being deducted. Mutual funds charge these fees to pay for commissions paid to brokers, advertising costs, and any other charges involved in the marketing of the fund. They can range between 0.25% and 1.00% of the net asset value of the fund per year.
12(b)-1 fees will not be as obvious as loads, but you can find out what they are for a given mutual fund either by checking the general information on the fund listed on the fund family's website. You can also learn about them by getting a copy of the fund prospectus.
Target Date Funds. These are fees unique to target-date funds. As target-date funds become more popular, though, they are being seen more often. Target date funds are sometimes referred to as a “fund of funds” because they can be comprised of several different underlying funds.
For example, a target-date fund may invest in funds that are based on the S&P 500 index, technology stocks, international stocks, and a bond fund. Each of those funds will have its associated fees, but the target date fund may have its own additional fees. Despite their rising popularity, target-date funds do tend to be more fee-intense than other investment types.
Account fees. If your 401(k) plan is held through a fund family, there may be an account fee charged. This is similar to the administrative fee paid to the trustee of the plan. And it will be used to cover the various administrative fees involved in running the plan.
That's a lot of fees coming from different directions, so how can you possibly keep it all straight? There are actually some popular free services out there, and they can help you do just that.
Personal Capital Fee Analyzer
You can use a free service like Personal Capital that also includes a Fee Analyzer. The tool enables you to determine fees being charged both in your 401(k) plan itself and the individual mutual funds.
In fact, this is an important part of the overall service that Personal Capital provides. They maintain that investment fees can cost your retirement portfolio hundreds of thousands of dollars over a lifetime. (Of course, we saw this in the example given earlier.)
As mentioned, Personal Capital has a free version, which includes use of the Fee Analyzer. They also enable you to calculate your net worth, set a budget, manage investment accounts, and plan for retirement -- all for free. But if you want more, like professional investment management, Personal Capital does charge a small fee.
Pontera ( formerly FeeX)
Pontera specializes in analyzing fees associated with retirement plans. They provide an analysis of your 401(k) plan, as well as 403(b) plans, 457 plans, and IRA accounts. Their Pontera Concierge can even analyze taxable investment brokerage accounts.
Pontera describes themselves as The Robin Hood of Fees, interestingly enough. That is their way of explaining how they level the playing field between investors and the big investment concerns. They consider themselves to be an investment fee reducer.
They accomplish this by analyzing your account, making you aware of the fees that you are actually paying. They even make recommendations as to how to rearrange your plan to reduce those fees.
Pontera works with hundreds of investment brokers, such as Charles Schwab, Fidelity Investments, and TD Ameritrade. Once Pontera syncs up your accounts, they will scan them for exact expense ratios, plan fees, advisory fees, transaction fees, and any other fees that apply to your plan.
And like the Personal Capital Fee Analyzer, you can use Pontera’s service free of charge. All you do is sign up, and you will get the rundown on incurred fees in a matter of minutes. Pontera will then recommend either replacing high fee mutual funds or ETFs with lower-cost ones or even recommend alternative investment firms if that option is available.
FINRA Fund Analyzer
The Financial Industry Regulatory Authority, better known as FINRA, is an independent, not-for-profit organization. They have been authorized by Congress to protect investors by making sure that the securities industry operates fairly and honestly. It is not a part of the US government, but it has considerable authority.
This includes writing and enforcing rules governing the activities of nearly 4,000 securities firms with over 600,000 brokers. They also provide examinations of those firms to ensure compliance with the rules, promote market transparency, and provide investor education.
As part of that education, FINRA provides a FINRA Fund Analyzer. This can conduct an analysis of more than 18,000 mutual funds, ETFs, and exchange-traded notes (ETNs). It provides an estimate of the fees and expenses that are charged within each of those funds.
The service is restricted to fund analysis and not retirement portfolios. But like the other tools listed above, FINRA’s Fund Analyzer is free to use.
Now you have a number of tools that you can use to determine the fees that you’re being charged in your 401(k) plan, as well as the funds that make up a plan. As you get a good idea as to what you are really paying, you can attempt to make any necessary changes that might lower those fees, and improve your long-term return on investment in your plan.