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Average 401k fees.

The Truth About Average 401k Fees

You’ve worked hard for your money, right? . So when it comes to your 401k retirement savings, you want every penny working as hard as you did to earn it. . That’s why it’s crucial to understand the fees associated with your 401k plan – because high fees can seriously eat into your nest egg over time.Imagine this scenario: You have $100,000 invested in your 401k, with an average annual return of 7% over 30 years. . If you pay 0.5% in fees each year, your balance will grow to $761,225. . But if you pay 1.5% in fees annually, your balance after 30 years drops to just $532,899.That 1% difference in fees results in over $228,000 less in retirement savings!The reality is, most people have no clue what they’re paying in 401k fees. . And the companies managing these plans aren’t always upfront about disclosing all the charges. . So in this guide, we’re pulling back the curtain on average 401k fees to help you understand exactly what you’re paying – and how to minimize those pesky costs.

What Are 401k Fees?

Before we dive into the numbers, let’s quickly cover the different types of fees you might see in your 401k plan:Investment fees are the expenses charged by the mutual funds or other investments in your 401k portfolio. . These include fund management fees, administrative fees, marketing costs, and other operational expenses. . They’re deducted directly from your investment returns.Plan administration fees cover the day-to-day costs of running the 401k plan itself. . This can include recordkeeping, accounting, legal support, employee education – basically anything involved in keeping the plan compliant and operational.Individual service fees are charges for account activities like taking a loan from your 401k or requesting a distribution. . These are typically flat fees rather than percentages.Got all that? . Great, now let’s look at what the average American is actually paying across these different fee categories.

Average 401k Investment Fees

Investment fees make up the biggest chunk of total 401k costs. . According to the Investment Company Institute, the average investor paid 0.43% in investment fees for a 401k account balance of $10,000 in 2020.That may not sound like much, but remember – that’s just an average. . Many people are paying significantly more, especially if their 401k is loaded up with expensive actively-managed mutual funds instead of low-cost index funds.In fact, the ICI study found that the most expensive 25% of 401k funds charged over 0.78% in investment fees alone!

Plan Assets Average Investment Fee
$1 million 0.63%
$10 million 0.41%
$100 million 0.29%
$1 billion 0.23%

As this table shows, larger 401k plans tend to have lower investment fees on average. . That’s because big employers have more bargaining power to negotiate lower costs for plan participants. . If you work for a smaller company, your investment fees are likely higher than these figures.

Average 401k Administration Fees

In addition to investment fees, there are costs to actually administer and operate a 401k plan. . According to the Plan Sponsor Council of America, the average small 401k plan (under $10 million in assets) paid $59 per participant in flat administration fees in 2021.For larger plans over $200 million, the average administration cost was just $28 per participant. . And for plans over $1 billion, it dropped to $18 per participant.These flat administration fees are often charged directly against each participant’s account balance. . So someone with a $50,000 401k balance in a small plan could be paying over 0.1% in administration fees alone!There’s also another administration fee that’s charged as a percentage of assets rather than a flat rate. . The PSCA found the average for this asset-based administration fee was:

  • 0.37% for plans under $10 million
  • 0.28% for plans between $10-200 million
  • 0.11% for plans over $1 billion

So for a small 401k plan, you could easily be paying close to 0.5% in total administration fees between the flat rate and percentage charges.

Plan Assets Flat Admin Fee Asset-Based Fee Total Admin Fees*
$5 million $59/participant 0.37% 0.74%
$50 million $42/participant 0.28% 0.56%
$500 million $28/participant 0.11% 0.22%

*For a $50,000 account balanceAs you can see, administration fees for small 401k plans can really add up, especially when combined with higher investment expenses.

Average Total 401k Fees

When you combine all the different investment fees, administration charges, and any individual service fees, what does the total 401k fee landscape look like? . According to the Investment Company Institute’s latest study:

  • The average total cost for a 401k plan with less than $1 million in assets was 1.21%
  • For plans between $1-10 million, the average total fee was 1.08%
  • Plans over $1 billion in assets had the lowest average fees at 0.35%

The BrightScope/ICI study found broadly similar results, with total plan costs ranging from 1.21% for plans under $1 million down to 0.28% for plans over $1 billion.

Plan Assets Average Total Fees
< $1 million 1.21%
$1-10 million 1.08%
$10-100 million 0.72%
$100 million – $1 billion 0.48%
> $1 billion 0.35%

So if you participate in a small 401k plan, chances are you’re paying total fees over 1% annually. . For larger plans over $100 million, average fees tend to be under 0.5%.To put that in perspective, if you have a $500,000 account balance:

  • Paying 1.21% in fees costs you $6,050 per year
  • Paying 0.35% in fees is just $1,750 annually

That $4,300 difference really adds up over 20-30 years of saving for retirement!

Why Do 401k Fees Vary So Much?

You might be wondering – why is there such a huge gap in fees between small and large 401k plans? . There are a few key reasons:

  1. Negotiating power – Big employers with thousands of employees simply have more leverage to negotiate lower fees from 401k providers. . They can easily take their multi-billion dollar plan to a competitor if fees are too high.
  2. Investment selection – Larger plans tend to use more institutional investment products like collective trusts and separate accounts, which have very low costs. . Smaller plans rely more on retail mutual funds with higher expense ratios.
  3. Plan complexity – Running a 401k for a small 25-person firm is much simpler than a 10,000 employee mega-corporation. . More complex plans with things like company stock funds, brokerage windows, etc. have higher administrative costs.
  4. Revenue sharing – Some 401k providers get paid through “revenue sharing” payments from the investment funds in the plan. . This can incentivize them to recommend higher-cost funds that kick back more revenue.
  5. Service model – The largest 401k providers can spread their costs over millions of participants to reduce per-person fees. . Smaller providers don’t have the same economies of scale.

At the end of the day, 401k fees come down to a basic economic principle – suppliers will charge what the market can bear. . And unfortunately, many small businesses simply lack the resources and negotiating leverage to demand lower-cost 401k plans for their employees.

Why 401k Fees Matter So Much

You might be thinking – “So what if I pay an extra 1% in 401k fees? . That’s not a huge deal, right?”. . Wrong – fees are one of the biggest factors impacting your 401k balance at retirement!Let’s look at an example to see just how much 401k fees can cost over 30-40 years:

  • You have a $50,000 starting balance at age 30
  • You contribute $500 per month
  • Your investments return 7% annually before fees
  • You retire at age 65

If you pay 0.25% in total 401k fees, your balance at age 65 will be $1,142,000.But if you pay 1.25% in total fees (a 1% difference), your balance drops to just $887,000 – that’s $255,000 less!Over decades of compounding returns, even seemingly small differences in fees can cost you hundreds of thousands of dollars. . That’s why it’s so important to understand what you’re paying and take steps to minimize costs where possible.

How to Find Your 401k Fees

By now, you should have a good grasp of what average 401k fees look like across different plan sizes. . But what about your specific 401k account – how can you determine the actual fees you’re paying?The good news is, federal regulations require 401k providers to disclose all fees charged to plan participants. . You should receive an annual fee disclosure notice that spells out:

  • Investment fees for each fund option in your plan
  • Any flat-rate administration or recordkeeping fees
  • Percentage-based asset fees
  • Transaction fees for loans, distributions, etc.

This disclosure should clearly state the total all-in cost you’re paying, expressed as both a dollar amount and percentage of your account balance. . If you can’t find this information, contact your 401k administrator to request it.You can also check the expense ratios for any mutual funds in your 401k by looking at the fund prospectus or checking sites like Morningstar. . Just keep in mind the expense ratio only covers investment management fees, not any additional administrative costs.

Strategies to Reduce 401k Fees

Once you know what you’re paying in 401k fees, you may be motivated to try and reduce those costs. . Here are some potential strategies to consider:For employers/plan sponsors:

  • Benchmark your plan’s fees against industry averages for your plan size
  • Use lower-cost investment options like index funds and collective trusts
  • Negotiate with current providers or consider switching to a lower-cost provider
  • Pay some fees from corporate profits instead of deducting from accounts
  • Educate employees on making cost-effective investment choices

For employees/participants:

  • Choose lower-cost index funds and avoid actively-managed funds
  • Consolidate old 401ks into your current employer’s lower-cost plan
  • Lobby your employer to reduce investment fees or switch providers
  • For very high fees, invest only enough to get the maximum employer match

While lowering 401k fees is easier said than done, it’s one of the most effective ways to grow your retirement savings over the long run. . So take the time to understand what you’re paying – your future self will thank you!

The Bottom Line on 401k Fees

High 401k fees can take an enormous bite out of your retirement nest egg if left unchecked. . By understanding average fee levels and what you’re actually paying, you can take steps to minimize costs and keep more of your hard-earned money working for you.The key takeaways?

  • Small 401k plans (under $10M) have average total fees over 1%
  • Larger plans ($100M+) typically have average fees under 0.5%
  • Investment fees are usually the biggest cost, followed by administration fees
  • A 1% higher fee could cost you $250k+ over 30 years of saving
  • Review your fee disclosures and choose lower-cost index fund options
  • Employers should benchmark fees and negotiate with providers

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