Let’s look at an average fee on a 401k plan, 2%. The plan participant (employee) is contributing $10,000 a year and the company (employer) is contributing $3,000. Let’s give this participant an average rate of return of 5% over a 20 year period…what would they have?
The participant and the employer contributed $260,000
The growth in the account is $95,811
The fees the participant paid are $69,380
Let me make this clear…the growth in the account is $95,000 and the fees on the account are $69,000.
Fees matter! 401k fees are systematic; you pay them every quarter no matter if you gain or lose money. So how do you find your specific fees? Get a copy of your 401k plans summary and annual report.
Here is a breakdown of the fees. There are three categories of fees according to the departments of labor (DOL):
Plan administration fees – day to day operation of running the 401k plan
Investment fees – expenses associated with managing the plans investments. These fees include:
Sales Charges – loads and commissions
Management fees – advisory fees or account maintenance fees
Marketing fees – 12b-1 fees
Other fees – recordkeeping, statements, phone fees
Individual service fees – individual services fees associated with optional features offered under a 401k plan. These include 401k loan fees.
401ks are a huge part of employee’s retirement savings. Understanding the costs and functionality of these plans will have a huge impact on how much money you actually get to keep!