MINNEAPOLIS (WCCO) — With almost $5 trillion in assets, 401(k) plans now account for nearly one-fifth of all retirement assets, but many of us have no idea how much it costs to fund those accounts. One study from AARP found, 7 in 10 people don’t know they even pay 401(k) fees.
So, how much do we pay in 401K fees? Good Question.
“It depends a great deal depending on who the plan providers are and what your plan has negotiated,” University of Minnesota finance professor Murray Frank said. He also serves on the University’s Retirement Subcommittee, which, he says, looks at 401(k) fees closely.
According to BrightScope, a financial firm that ranks 401(k)s, the average fees ranged from 0.53 percent to 0.91 percent, depending on the measurement. When the plans were weighted, the cost was 0.91 percent, but when the participants were weighted, the cost was 0.53 percent.
“First, participants and assets tend to be concentrated in larger plans,” the BrightScope and Investment Company Institute December 2014 report said. “Another reason that participant-weighted and asset-weighted total plan costs are lower than plan-weighted total plan cost is because larger plans tend to have a lower total plan cost when measured as a percentage of plan assets.”
In general, larger firms tend to have smaller fees because they can spread out the costs over many more people. BrightScope found the 401(k) fee range for smaller firms was generally between 1-2 percent.
There are usually several layers of fees, including investment, administrative and individual service fees.
“There are services being provided, so naturally, there will be some costs,” Frank said. “The issue is whether they’re reasonable or not.”
Over the course of 35 years, the difference between 1 percent and 2 percent can add up to tens or hundreds of thousands of dollars. According the Department of Labor, a $25,000 401(k) that assumes 7 percent growth over 35 years with no more contributions would add up to $227,000 with a 0.5 percent fee. But, if that fee were 1.5 percent, that 401(k) account would only grow to $163,000.
Frank says employees should be able to find the fees in their 401(k) disclosure statements, summary plan description or annual report.
“Read the documents and when something doesn’t make sense, ask,” Frank said.