My 401(k) Plan Is Free Right? Retirement Plan Fees Explained

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There’s a pervasive myth that 401(k) plans don’t have fees. While the plans are valuable and worthwhile, they are most definitely not free.

According to the Investor Pulse Survey from TD Ameritrade, 27% of Americans who participate in a 401(k) think they know how much they are paying in fees. Additionally, 37% mistakenly believed they were paying no fees at all.  Zero, Zilch, Nada.

Fees vary from plan to plan and depend on which investment choices you make within that plan. What needs to be clear is that all 401(k) plans have fees and there is no free lunch when it comes to saving for retirement.

Here is a quick tutorial on how to figure out what you are paying in fees on your 401(k) plans.

Many Americans believe they are paying no fees at all for their 401(k) accounts.


Understanding the fees on their 401(k) plans tends not to be a high priority on the long to-do list of most American workers. I admit that when I was an employee with a 401(k), I looked at the fees when I signed up for the plan. Although, I can’t remember ever looking at them again because there wasn’t anything I could do about them.

That being said, 14% of people don’t know how to determine their fees and another 22% have no idea if they are paying fees or not. At the same time, 37% of people believe their plan doesn’t have fees. All of this according to the aforementioned TD Ameritrade Survey.

The reality is all 401(k) plans have fees. There are three major categories of fees on typical 401(k) plans - investment fees, fees for participation and administration fees.

401(k) Fees are hard to Find

By law, the administrator of your 401(k) is required to send you quarterly statements with the fees and expenses clearly disclosed. These are relatively easy to find if you know where to look. Many of these statements are sent electronically, and never looked at.

I tested this with three clients and asked them to find the account fees on their statements. All three accessed their accounts online and sent me screen shots of their online client portals with no fees listed. I sent them back to their portals to search for the statements that would list the fees. Surprisingly, only two of the three were able to find their statements.

With a little digging we found their plans’ fees. With a few more clicks, we found prospectuses where additional fees were disclosed. Those thick booklets, which can average more than 90 pages each, coupled with the fine print to determine their fees, can deter people from reading them.

For my small sample, none of them had every looked at their full statements or prospectuses. To be fair, the fees on the statements were clear to me but not so clear and easy to find for the participants. That’s assuming they were looking for them to begin with.

Here is what you need to know to figure out what fees you might be paying.

Investment Fees on a 401(k)

If you have money in a 401(k), then you are paying investment fees. There are fees whether your money is in a money market fund, bond fund or investment fund. These fees cover management of the investments within your 401(k) plans and are likely the largest component of your overall 401(k) cost.

Your plan’s literature should list a thing called “Expense Ratio” next to your individual fund choices. That ratio is expressed as a percentage of your assets that you should expect to pay, in fees to that particular fund, each year. For example, if you chose a mutual fund with a 1% expense ratio, you would pay roughly $180 per year if your account balance was $18,000. If the expense ratio was 0.50% you would end up paying closer to $90 per year.

Fees can vary widely from investment to investment. Some of the lowest cost Exchange Traded Funds have expense ratios under 0.10%, where as more expensive mutual funds can have expense ratios of more than 2%.

I’m not advocating to pick funds based exclusively on fees. All the same, you should be aware of what you are paying.

Participant Fees on 401(k) Plans


By now, it should be understood that anyone with a 401(k) is paying investment fees.  Additionally, about 95% of people also pay participation fees which are often listed as “administrative” fees. These cover expenses of the plan such as record-keeping, accounting and legal fees.

Some plans roll these costs into the above-mentioned investment fees while others charge you directly. Fees can also be tied to your assets in the plan or be a flat amount per person, say $45 per year. Some employers subsidize or completely cover these costs while others pass 100% of the cost to the employees.

Should you worry if your 401(k) is a High-cost Retirement Plan?


Expenses are just one part of the picture with your retirement plan and low-expense funds are not always the best. Conversely, high-cost funds are not always the worst.  You also need to consider how much you are planning to contribute. The biggest factor here is if your employer offers a matching contribution. An employer match is when you get extra money from the company you work for based on your contributions and salary.

Fees will vary from plan to plan. You are more likely to have a lower-cost plan if you work for a large employer because large companies have more ability to lower the costs. Additionally, actively managed funds will generally have higher fees when compared to their passive (think index funds) counterparts.

Employer matching will likely more than offset a higher fee plan. For example, let’s assume you have a high-fee plan that charges 3% in fees, per year, and that your employer will match 3% of your salary if you invest 3%. You may look at this and think it will be wash if you pay 3% in fees and get an employer match of 3%. That isn’t how it works.

For year one, you put in 3% and your employer matches 3%. The match is based on your full salary. Assuming a salary of $100,000 per year, your contribution would be $3,000 and your employer’s contribution would be $3,000. Your plan’s fees would be about $180 or 3% of the combined $6,000 contributed by your employer and you. The fees will actually be lower but let’s use round numbers for this example. To be clear, the 3% fee is just on the amount in your 401(K). I would pay $180 any day if it meant I would get $3,000.

As your 401(k) balance grows, the advantage of the employer match will diminish because high fees will start to outweigh the match. This will occur once you have accumulated more than $100,000 in the plan. Until then, turning down an employer match would be like turning down a bonus or a raise. It would be crazy to do.

401(k) Contribution Limits

Another benefit to a 401(k) is tax deferral. You can contribute more to a 401(k) ($18,500 pre-tax) compared to a traditional IRA ($5,500). If you have the option of a 401(k) from your employer, your contribution limits to an IRA may be even lower if you are single and make more than $62,000 or $99,000 if you are married and filing jointly. You should strive to save at least 10% of your salary. Based on that, most I’d guess most of you reading this will need to save beyond just an IRA.

What People do with old Retirement Accounts


Most people bounce from job to job and combining previous plans into one low-cost locale may be more of priority if you know what you are actually paying on your old accounts. Respondents of the TD Ameritrade Study did one of four things with their old retirement accounts. Thirty-four percent of them rolled their old 401(k) accounts into IRAs and 31% rolled them into new 401(k)s. About 22% left their old plans with a former employer. Sadly, 13% reported cashing in their old retirement account. This is a big NO NO. Withdrawals are taxable and will also incur a 10% IRS penalty for individuals less than 59.5 years old.

Whether or not you’re paying high fees or low fees, the important thing is to save for your financial goals. At the very least, make sure to capture all of the employer match.  Also, be aware of your plan’s fees but don’t let them sour your saving experience.


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