A Look at 401(k) Plan Fees: What Are They and Who Pays for Them?
If you want to know how fees affect your retirement savings, you will need to know about the different types of fees and expenses, and the different ways in which they are charged. Fees and expenses for 401(k) plans generally fall into three categories.
Plan Administration Fees
The day-to-day operation of a 401(k) plan involves expenses for basic administrative services—such as plan record keeping, accounting, legal, and trustee services—that are necessary for administering the plan as a whole. Today, a 401(k) plan also may offer a host of additional services, such as telephone voice-response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation, and online transactions.
In some instances, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. Otherwise, if administrative costs are separately charged, they will be either borne by your employer or charged directly against the assets of the plan. When paid directly by the plan, administrative fees are either allocated among participants' individual accounts in proportion to each account balance, such as participants with larger account balances paying more of the allocated expenses, or passed through as a flat fee against each participant's account. Either way, generally the more services provided, the higher the fees.
Investment Fees
By far, the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account, because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted.
Individual Service Fees
In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a 401(k) plan. Individual service fees are charged separately to the accounts of participants who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.
Investments and services for a 401(k) plan may be provided through a variety of arrangements. Employers may directly provide, or separately negotiate with and hire different providers for, some or all of the various services and investment options offered under their 401(k) plans, in what is sometimes referred to as an unbundled arrangement. The expenses of each provider, such as investment manager, trustee, record keeper, and communications firm, are charged separately.
In many plans, some or all of the various services and investment options may be offered by one provider for a fee paid to that provider, sometimes referred to as a bundled arrangement. The provider will then pay out of that fee any other service providers that it may have contracted with to provide the services.
Some plans may use an arrangement that combines a single provider for certain services, such as administrative services, with a number of providers for investment options. Regardless of the arrangement used, fees need to be evaluated, keeping in mind the cost of all covered services.
U.S. Department of Labor. (n.d.). A look at 401(k) plan fees. Retrieved October 19, 2016, from http://www.usa.gov/