401(k) Fees: How Expense Ratios Eat Your Future

The 401(k) is the most popular retirement plan. Nearly half of Americans have 401(k) plans to save and invest for retirement.

But most workers contribute to a plan without knowing exactly what fees they’re paying or what they’re getting out of it, with little help from the companies that run those plans. A study by Abernathy-Daley found that 99% of corporate plans have at least one fund with a cheaper, higher-performing alternative, and 94% of plans have at least three funds.

It’s nice to have a retirement plan that you can set and forget, but if you aren’t checking on it, you may not realize how much you’re paying in 401(k) fees. WorkMoney has your guide to figuring out what you’re paying in 401(k) fees, how that translates into lost earnings, and what you need to do to fix it.

How Expense Ratios Are Calculated for Your 401(k)

The fees you pay depend on the size of your plan and who administers it. There are a few fees to watch out for: expense ratios, which are the costs of owning your fund. 

Your expense ratio is calculated by dividing your fund’s operating expenses by your account balance, or how much you have in your fund. You might see this referred to as “assets under management.” 

So if your expense ratio is 0.50%, you’ll pay $50 in expenses each year for every $10,000 invested. You won’t pay this separately; this fee is deducted from your fund’s assets and affects the net asset value. 

There are also administrative plan fees, like recordkeeping and customer support for your plan administrator, as well as individual service fees. All of these add up, running you anywhere from 0.5% to 2% or more, taken out of your earnings every year.

It’s normal to wonder how your plan fees compare to others. According to Morningstar research, plans with assets of $1 million or less pay an average annual fee of 1.26%. Plans greater than $1 billion pay 0.27%

Where to Find Your 401(k) Fees

When you receive a 401(k) statement, find your plan’s summary plan description (SPD) and look for terms like “expense ratios,” “total asset-based fees,” or “total operating expenses as a %.” You can also look at your plan’s annual report — Form 5500 series — to see your plan’s income, expenses, assets, and liabilities. 

You don’t have to wait for a statement from your plan administrator. Instead, log in to your 401(k) portal and look for the fund fact sheet or annual fee disclosure document to search for similar terms. You can also contact your plan administrator to request a fee disclosure document or a fund prospectus. 

How High Fees Impact Your Earnings

The Abernathy-Daley study finds that a 1% fee increase reduces retirement income by 28% over 35 years. This means that even if you contribute the same amount every year, high fees literally take away your retirement income. 

Say you contribute $6,000 every year to your 401(k) and earn a 7% annual return. After 10 years, a 2% expense ratio would reduce your balance from $82,898 to $75,467 — costing you about $7,431 in lost growth. After 20 years, that gap grows even wider, reducing your balance from $245,974 to $198,392, or about $47,582 lost to fees.

Over the long term, the impact becomes even more dramatic. With a 0.50% fee, investing $6,000 per year for 30 years would grow to about $517,860. But with a 2% fee, that same investment would grow to only $398,634 — a difference of $119,226.

Lowering your fees isn’t just to save in the short-term; it’s to maximize your savings for the entire time you’re saving for retirement. Otherwise, you may need to push retirement until you’re older or end up retiring with less money. 

How To Lower Sky-High Fees

Investing in your future matters, but you don’t have to stick with the current plan just because others do. Once you have an understanding of where to find your plan’s fees and how much you’re paying, it’s time to take charge of your 401(k) plan.

1. Avoid the default option. Don’t pick what everyone else chose for their investment portfolio. Instead, review all the fund options. A pre-selected plan may not be the cheapest option.

2. Generally consider Look for index funds. Actively managed funds tend to have higher fees than passively managed funds. Index funds are passively managed and don’t require as much attention, so there are fewer out-of-pocket costs to manage them.

3. Talk to the experts. Reach out to Human Resources and talk to your plan administrator. Plan managers are there to work in your best interest, including educating you on what different parts of your plan mean and the pros and cons of different investment options. If your goal is to lower fees, let HR and your plan manager know. They can help you craft a portfolio that works best for you.

Reading your plan documents to find fees isn’t always easy. You can invest more easily with Stackwell.* Answer a few questions, add your funds, and let the app create your personalized portfolio. You don’t have to stay stuck in your current plan, especially if you’re overpaying in expense ratios.

The Bottom Line

Your retirement plan needs to work hard for you. Fees are one of the few things you can control with your 401(k) plan. Log in to your 401(k) portal today, find your expense ratios, and figure out how much you’re spending in fees. Reach out to your HR department and plan administrator to see how you can lower fees and cut down on extra costs to save money down the road. Make a calendar reminder to keep tabs on your plan at least annually so you know what you’re paying in fees.

* Disclaimer: Stackwell is an SEC-registered investment adviser. Investing involves risk and your investments may lose value. Stackwell does not guarantee investment performance or future results. Educations materials and financial knowledge and confidence, but they do not replace personalized financial advice. For questions about Stackwell’s products and services, please visit stackwellcapital.com, review our FAQs, or contact them at support@stackwellcapital.com.