Do You Know How Much You're Paying for Your 401(k)?

If you signed up for your 401(k) plan without reading the fine print, you're in the majority. Most workers don't know the ins and outs of their 401(k) plan, and the fees involved are often so hidden that many don't even know they're paying fees at all.

Even if you're aware that your 401(k) plan charges fees, you probably don't fully understand what those fees are. According to a recent survey, roughly 3 in 4 people don't know how much they're paying in 401(k) fees. If your plan charges fees on the lower end, this isn't much of a problem—401(k) plans with fees in the 10th percentile charge just 0.41% of total invested assets.

The problem is the huge gap in fees between the lowest cost and highest cost plans, according to 401(k) rollover assistance company Capitalize. If your plan is on the higher end, you could be paying a lot more than you need to. Here's how to find out and what to do about it.

Part of the reason most workers don't understand how much they're being charged for their retirement plan is that there isn't a single flat-rate fee—in general, 401(k) fees fall into three different categories.

• Investment fees: This is the main fee most people pay to maintain their 401(k) plan, and it's charged to cover the work of managing your investments. Usually, this will be charged as a percentage of your total assets invested and deducted from your returns. This means you probably won't notice the fee unless you're looking for it.
• Plan administration fees: This is a fee charged to cover the cost of the services provided by plan administrators outside of managing your investments. These include everything from accounting and legal necessities to providing a customer service phone line. Sometimes this fee is taken from your returns as part of your investment fees, sometimes it's charged in proportion to your total assets under management, and sometimes your employer pays this fee.
• Individual service fees: These are individual fees charged for particular one-time services, such as taking a loan from your 401(k) or splitting up a 401(k) plan after a divorce.

As of 2020, the median fee charged by 401(k) plans was 0.85% and the median 90th percentile fee was almost 1.5%. These differences might seem slight, but they add up over time.

Capitalize provides an example of a 401(k) account with a $55,000 balance providing annualized returns of 9.2%. If you're being charged the low-end fee of 0.40%, you'd have an extra $90,000 after 30 years than if you're being charged the median fee of 0.85%.

You can find the details of your 401(k) plan fees in your plan's Summary Annual Report (SAR). Plan administrators are required to provide this report once each year, and it should be distributed to you by your employer.

Unfortunately, these fees aren't usually listed in a straightforward manner, so you'll have to calculate them yourself. First, you'll want to calculate your plan's administrative fees using the following process.

1. Find your plan's total expenses and benefits paid in your SAR.
2. Subtract the benefits paid from the total expenses.
3. Take that number and divide it by the total value of your plan.
4. This number is your plan's administrative fee expressed as a percentage of your total assets in the plan.

To find your investment fees, which likely make up the bulk of what you're paying for your 401(k) plan, you'll want to look for the expense ratio. You can usually find this by logging onto your plan's account and navigating to the fund details page. This fee is assessed annually as a percentage of your total investments and subtracted from your returns. A typical 401(k) expense ratio is 1%, which means if your plan earned 10% in returns last year, you only saw 9%.

If you feel your 401(k) plan's fees are high but you're still employed at the company sponsoring your plan, there's little that can be done. You might be able to transfer money from your 401(k) to an IRA, which can help you save money if you go with a low-cost account and can give you more flexibility to invest in other assets. Either way, it's almost always still worth continuing to contribute to your current 401(k) thanks to the tax benefits, especially if your employer offers company matching. 

However, you might decide that it's not worth contributing more than what your employer matches. In that case, you can funnel those additional funds into a different investment account. For example, you could look for a low-cost individual retirement account (IRA) and aim to max that out every year—2021 contribution limits for IRAs are $6,000 per year if you're under 50 and $7,000 if you're 50 or older.

You could also consider opening a retirement account or other investment account with a low-cost robo-advisor. For example, Betterment offers investment accounts with annual fees as low as 0.25% to 0.40%.

If your 401(k) plan is from a previous employer, you could consider rolling over your 401(k) to a new employer with a more cost-efficient plan or rolling it into an IRA.

Robo-advisor Blooom even offers a free 401(k) analysis that will help you identify hidden fees and asset allocation issues that could be eating into your returns. If you decide to let Blooom help you optimize your retirement accounts based on their suggestions, you can sign up for one of their plans for a flat-rate fee of $45 to $250 per year depending on how extensive your needs are.

While hidden fees aren't reason alone to not contribute to your 401(k), they are worth looking into. Because retirement plans invest for the long-term, making even the smallest adjustments to lower costs and improve returns can have a huge impact on how much money you have when you retire.