The High Costs of 401ks; what are you paying? It will shock you!

If you don’t know…you’re not alone. A recent AARP study found that more than 80% of 401k participants were unaware of how much they were paying in fees associated with their company’s retirement savings plan; 401k’s, 403b, 457's, etc.  Be very worried about what you don’t know or what you think you know!

In 2014, BrightScope review of over 600,000 plans and found the average cost of a 401k plan is 2%.  A shocking find was the number 401k plan participants paying 4-5% fees.  The plans charging these outrageous fees tended to be small to midsized companies managing less than $100 million dollars in assets.     

 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:  Expense ratio  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!

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:

Expense ratio

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!