What Are 401k Fees and Who Pays Them?

Many 401k plan participants believe that their retirement plan is a benefit provided at no cost by their employer. But, in fact, 401k plans have many associated fees and most of these are paid by the plan participant – not the employer. A recent study of 401k fees finds that participants bear the majority of 401k plan costs: participants pay 83% of 401k plan fees while employers cover 13% and the plans cover 4%. Participants pay the majority of plan fees in the form of investment expense ratios. This means the fees are deducted directly from the 401k account so that it is not always clear to the participant that he or she is paying.

Fees can have a big impact on a 401k nestegg

Fees can have a big impact on a 401k nestegg

What types of fees are associate with 401k plans? 401k’s are complex retirement systems that can require many different types of investment, recordkeeping, administrative, educational and other services to function smoothly:

  • Recordkeeping
  • Plan and Participant Servicing
  • Compliance
  • Legal
  • Audit
  • Form 5500
  • Trustee
  • Company Stock
  • Communications
  • Education
  • Investment Management
  • Investement Consultant
  • Financial Advice
  • Following is a useful chart of the dynamics of 401k fees between participants, plan sponsors and service providers:

    401k Fee Mechanics

    401k Fee Mechanics

    Perhaps the most important question regarding 401k plan fees is “how much do the fees cost?” The consulting firm Deloitte recently published an excellent survey/study of 401k fees.

    Deloitte 401k Fee Study

    Deloitte 401k Fee Study

    This study found that the median “all-in” (total) fee for 401k plans in their survey was 0.72% of assets (or about $350 annually per participant) for the median account size of $48,522. However, 401k fees can vary widely:

  • the mean (average) fee was 0.93% ($397)
  • 10% of 401k plans have fees of 0.35% ($103) or less
  • 10% of 401k plans have fees of 1.72% ($842) or less