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How hidden 401(k) fees can ruin your retirement

Sept. 25, 2013
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A recent study found that the average total cost for a small business retirement plan declined to 1.46% over the past year, and that within this amount the investment related expenses, typically borne by participants, average 1.37%. This particular study defined small plans as those with 50 participants or $2,500,000 in assets.  However, if you own or work for a business that has fewer than 50 participants or less than $2.5 million in plan assets, odds are you’re paying a substantial amount more in 401k fees.  Plans in this demographic are defined as “micro” plans. It is not uncommon for the underlying investments in these plans to have expense ratios averaging between 1.50% and 2%. This has a major impact on retirement savings over time that can be difficult to decipher.

Why is this important to you?  While 1.0% may sound insignificant, the costs of your investments can have a staggering affect on your retirement savings over time. According to the Department of Labor, paying just 1 percentage point more in expenses over the course of 35 years could reduce a worker’s retirement savings by nearly 28 percent.  For example, Bob is a participant in a plan offered by his employer with a 401(k) balance of $25,000 that earns 7 percent over the next 35 years.  If Bob paid 0.50% in fees, even if he stopped making new contributions, his account would grow to $227,000 at retirement. But if he paid fees totaling 1.5 percent, the savings would rise to only $163,000, or 28 percent less.

A startling statistic is that in a recent survey by the AARP, nearly 70% of participants in 401k plans believe they are paying no investment related expenses or that their employer absorbs these fees.  That just is not so.  Thankfully, over the past year new rules related to fee disclosure and fee transparency in 401k plans have been put in place.  Employers that sponsor a 401k plan are now required to provide information about the expenses connected with the various investment options offered within the plan and the amounts deducted from participant accounts to cover the cost of administering the plan (if any). This is provided in the form of a document called the 404(a)(5).   If you are a participant in a 401k plan the first time this disclosure was required to be provided to you was at the end of August 2012.   It should be readily available to you, either at the website you visit to mange your 401k, or by calling your plan provider.

It’s worth spending some time reviewing this document and taking action if your plan offers lower cost investment options.  According to the 2013 Retirement Confidence Survey, about half (53 percent) of defined contribution plan participants do report having noticed this information, although only 14 percent of those who noticed this information (7 percent of all plan participants) say they have made changes to their investments as a result of the expanded information about fees.

A review of your own 401k fees and investment options can have another decided effect.  Plan sponsors are now required to compare their current plans against alternatives; to be sure all fees are reasonable and prudent.  Most employers have not gotten around to completing this requirement.  A downside to this is that often times the business owner(s) is the one with the highest balance in the plan.  They are busy running the business and may not notice their own retirement plan savings are being shortchanged by costly investment options.   Pointing out your findings might give your employer a heads up to see if looking at other options might be a change for the good of entire company and help better plan for a secure retirement for all.


This article was contributed by Tom Zgainer of America’s Best 401(k) and does not necessarily reflect the views or opinions of NerdWallet.

Tom Zgainer has helped over 2600 companies obtain a new or improved retirement plan over the past 12 years. An expert in retirement plan strategic design, Tom and his company have a simple mission: To rescue the retirement savings of American’s from plans with high, unreasonable, and excessive fees.   You can learn more at  or on Twitter @AB401k


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