Saving for retirement through a 401(k) plan sounds simple enough, but a lot of people are still unaware of all the fees associated with this retirement plan. Remember, a 401(k) plan is a retirement savings contribution provided by an employer. Each paycheck an employee receives has a portion of the total amount taken out and used towards the 401(k) plan -- this is known as a contribution.

Typical fees

The United States Department of Labor has an excellent resource that helps people understand all of the fees associated with a 401(k) plan. Here is a quick breakdown of fees that most people should know about when they look at their retirement account.

Here is a breakdown of fees you should expect to pay:

  • Administration fees - Keeping records of documents, accounting, and all other administrative tasks all fall under this category. These fees are associated with services such as online transactions and investment advice.
  • Investment fees - This is the portion of your money that goes to an investment management service, or any related investment service.
  • Sales charge - Whenever you buy or sell a share, you are charged for completing the transaction.
  • Individual service fee - If you take a loan from your plan, or execute participant investment directions, you are subject to pay a fee.
  • Target date retirement funds - If a target date fund invests into another mutual fund, there may be fees associated with this process.

Every year the Internal Revenue Service sets limits to how much a person can contribute to their 401(k). The 2014 limit is set at $17,500. Review the limit every year to understand the maximum amount of money you can contribute to your retirement account.

What about taxes?

The way a 401(k) plan works is that you are not taxed until you start to receive your money during retirement. Most people do not collect their retirement money until they are done working, but some tap into the account early when they need money very quickly. Just note, you are taxed based on the date you withdraw money from your retirement account. So if you decide to take out money two years from now, and you're far from retirement, you will be subject to pay taxes and fees at that time.

Hidden fees

Have you heard that 401(k) plans come with hidden fees? This is not necessarily true, but there are fees you may overlook because you are not paying attention to your retirement account. Make sure you read the fine details and pay attention to these fees. If you deal with a third party entity who manages your 401(k) account, you are most likely paying more fees than someone who doesn't use this type of service. A person who has a plan through a third party administrator should expect to pay the following fees.

Hidden fees from third party firms:

  • Administrative
  • Investment
  • Asset
  • Audit

To learn about the fees you have to pay in detail, read the contents of your 401(k) contract with your employer or a trusted advisor to get an overview of the fees that come with a retirement account.


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