A Look at 401(k) Plan Fees: Why Consider Fees?
In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account, which will reduce your retirement income. The following example demonstrates how fees and expenses can impact your account.
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.
In recent years, there has been a dramatic increase in the number of investment options typically offered under 401(k) plans, as well as the level and types of services provided to participants. These changes give today's employees who direct their 401(k) investments greater opportunity than ever before to affect their retirement savings. As a participant you may welcome the variety of investment options and the additional services, but you may not be aware of their cost. As shown above, the cumulative effect of the fees and expenses on your retirement savings can be substantial.
You should be aware that your employer also has a specific obligation to consider the fees and expenses paid by your plan. The Employee Retirement Income Security Act (ERISA) requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of the plan participants and their beneficiaries. Among other things, this means that employers must
- Establish a prudent process for selecting investment options and service providers
- Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided
- Select investment options that are prudent and adequately diversified
- Disclose plan, investment and fee information to participants to make informed decisions regarding their investment options under the plan
- Monitor investment options and service providers once selected to see that they continue to be appropriate choices
U.S. Department of Labor. (n.d.). A look at 401(k) plan fees. Retrieved October 19, 2016, from http://www.usa.gov/