Millions of hard-working Americans sock away a percentage of their salaries into employer-sponsored 401(k) plans each year in order to prepare for retirement. The widespread popularity of these plans has led to a substantial improvement in both the investment selection and money management features offered inside these plans over the past 20 years. However, the costs and fees of these plans have also risen commensurately during that time. But many of these expenses are coming under increased scrutiny by the SEC and other regulatory authorities such as FINRA and Congress in recent years. Some industry pundits say that these fees are too high, while others maintain that the majority of plan participants have little or no idea that many of these fees even exist, let alone what they are being charged for or how much they are really paying. (For related reading, also check out Is Your 401(k) Administrator Competent?)


IN PICTURES: 5 Tax(ing) Retirement Mistakes

Here are some of the common fees found in many 401(k) plans:

Plan Administrative Fees
Most 401(k) plans charge some sort of annual administrative fee to their participants. This fee typically ranges from $35-50 per year and is usually assessed either quarterly or annually.

12b-1 Fees
This fee is usually passed along by the providers of the mutual funds that the participants can choose from within the plan. This fee can run anywhere from 15-25 basis points up to 1% of assets in some cases. They are used to cover a variety of mutual fund administration costs, such as fund portfolio management, marketing and advertising, and other miscellaneous expenses.

Money Management Fees
Some 401(k) plans are managed directly by professional money managers or Registered Investment Advisers who actively manage the participants' money by trading securities. These managers usually charge a percentage of assets out of the plan each year, which is assessed out of each participant's account on a pro-rata basis, typically on either a quarterly or annual basis.

Mutual Fund Sales Charges
Plans that invest directly in open-end mutual funds will typically offer A, B and C shares for all fund offerings. Class A shares charge a percentage of assets invested up front (typically 3-5%), while B shares charge higher 12b-1 fees, but nothing up front. However, they have a back-end sales charge schedule that declines to zero after a several years. Class C shares are usually the most expense laden class of share offered. Annual fees are typically high, and typically if the shares are sold within a year of purchase there will be a back-end load. (To learn more, see Stop Paying High Mutual Fund Fees.)


IN PICTURES: 5 Ways To Control Emotional Spending

Variable Annuity Contract Expenses
Many 401(k) plans are funded entirely with variable annuity contracts that offer a range of mutual fund subaccounts within the contract. These contracts have their own set of fees that closely match those found in other types of 401(k) plans, including:

  • Annual Contract Maintenance fees - These may be charged on top of the fee charged by the 401(k) plan administrator, and are usually between $40 - $100 per year.
  • 12b-1 fees - Similar to those charged in plans that do not offer variable annuity contracts, usually about 0.25-1% per year.
  • Mortality and Expense fees – To cover the costs of some of the insurance benefits within the plan, these can be as high as 1.5% per year.
  • Cost of Riders – Many contracts offer special riders that provide specific living or death benefits that may be purchased on top of the standard benefits of the contract, and can range from 0.5% to 1.5% per year.

When these fees are totaled, they can easily equal 2-3% of a given participant's plan balance each year. Furthermore, these fees are usually assessed regardless of whether the account value rises or falls, and either reduce the returns posted by the vehicles the plan is invested in or else reduce the absolute value of the account. Therefore a worker who has $10,000 invested in a typical growth stock mutual fund inside his or her 401(k) plan could pay an administrative fee of $50 each year, plus 12b-1 fees of perhaps 0.75% per year, plus a 4.75% sales charge assessed by the fund within the plan.

The Bottom Line
Many workers are largely unaware of the various fees that their plans charge them or what the fees are for. For more information on the fees that your plan is charging you, contact your financial advisor, plan custodian or administrator, or your HR department. (For more information, see Bear Spray For Your 401(k).)

Find out what happened in financial news this week. Read Water Cooler Finance: Steady Stocks, Big G's And Madoff News.

Related Articles
  1. Fundamental Analysis

    3 Misconceptions About Warren Buffett

    Learn why Warren Buffett is the man behind the curtain and how he is misunderstood regarding the ways he has adapted and changed his investing approach over the years.
  2. Savings

    What Your Credit Score Means for Your Love Life

    Wondering if your significant other wants to commit and is reliable? The Fed might have the answer.
  3. Your Clients

    Tips for Making Your Nest Egg Last Longer

    If you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest.
  4. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  5. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  6. Retirement

    Early Out: A Realistic Plan to Retire Younger

    If you want to retire ahead of schedule, it'll take some extra planning.
  7. Mutual Funds & ETFs

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  8. Retirement

    6 Robo-Advisors That Require Little to Start

    There are many well-regarded robo-advisor options that come with minimum investment amounts. Here are snapshots of a handful of them.
  9. Retirement

    Smart Ways to Tap Your Retirement Portfolio

    A rundown of strategies, from what to liquidate first to how much to withdraw, along with their tax consquences.
  10. Your Clients

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
RELATED FAQS
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  5. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  6. How does my spousal Social Security benefit work?

    If you have never worked or paid Social Security taxes, you will not be eligible to receive Social Security retirement benefits ... Read Full Answer >>
Trading Center