Is Your 401(k) Plan Costing You More Than You Think?

Since January 1, 1980, the 401(k) has been the fastest-growing and one of the most popular forms of retirement savings plans for employees across the U.S. Congress amended the Internal Revenue Code in the late seventies in order to establish the plans, which allow employees to invest in tax-sheltered savings accounts that could be withdrawn from upon retirement. Originally intended as a supplement to traditional pensions, most plan holders today depend on their 401(k) plans as their one and only nest egg.

Even though some 50 million Americans are relying on their 401(k) plans to provide a solid retirement income, very few understand the complex—and often times hidden—costs associated with their plans. In fact, according to AARP, 83% of Americans are unaware of fees or don’t know the amounts deducted from their savings. 

All sorts of plan fees exist. From administrative fees for bookkeepers, trustees and legal advisors, to distribution fees and management or investment advisory fees, plans are taking annual percentages as high as 3% in some cases. While the industry average is somewhere around 1.5%, that amount can still equate to tens or even hundreds of thousands of dollars in fees over the course of an employee’s career.

Sharp investors examine their plan’s options and investigate any associated fees and costs. The investigation process can be time consuming as the system of disclosure puts the burden on the investor to request the documentation and read through the plan’s fine print. Fees can be listed in one all-inclusive number or, in the case of larger plans, broken out into smaller portions. 

As an employee, don’t be afraid to contact your benefits or human resources department and ask how funds are selected or about administrative costs. You can also request a prospectus for each of your funds—or call the funds directly. In the prospectus, you will find the expense ratio charged to manage your money. The lower the expense ratio, the less worry you have, but you should familiarize yourself with the specific types of deductions being made and how those deductions impact your long-term saving strategy. Know, too, that although you can raise questions and even complain about fees, you cannot take your business elsewhere. You are locked into the plan chosen by your employer.

As an employer, it is important to provide information to employees and be responsive to their concerns. While small companies may have less negotiating power than large corporations, it is vital that you understand the fees associated with your company’s plan and who pays them. A small percentage of employers still pick up the administrative fees in their employee plans, but making informed choices with knowledgeable, ethical administrators can result in thousands of dollars more in retirement savings for employees.

Both employees and employers need to gather as much information as possible in order to make informed choices and ask questions of plan administrators and advisors when something doesn’t make sense. As Congress continues to try to make financial institutions more accountable and more transparent, it remains incumbent upon the investor to work diligently to protect their investment in retirement.