Frugal Living Investing 101 Money Management Beyond Money

Fees in Your 401(k)

by MoneyNing

Last week I came across a study done by the Investment Company Institute together with Deloitte regarding the expenses charged by 401(k) and other defined contribution plans. Here’s the short version:

The median fee for the 130 plans in the study was 0.72 percent of assets, within a range from 0.35 percent (the 10th percentile) to 1.72 percent (the 90th percentile) of assets.


It’s important to recognize that these fees are in addition to the fees charged by the funds within the plan.

Remember last week when we discussed what costs can do to the performance of your mutual funds? The big lesson was that annual costs are a major factor in determining your results. The fees mentioned in this study are yet another layer of annual costs.

So what should you do about it?
Find out what you’re paying.
Without a doubt, the first step is to determine precisely how much you’re paying for administrative fees in your 401(k). Your HR department should be able to provide this information. (It’s probably included in the packet of information they give to new employees. Look for something labeled “Prospectus“.)

If your 401(k) expenses are near the low end, perhaps you don’t need to worry. But if they’re up around 1% or more, then it’s probably time to take action.
Regardless, don’t pass up your match!
I’m not saying that it’s a bad idea to contribute to your 401(k). If your employer offers a match, take advantage of it! Getting that free money is almost always priority #1 when it comes to investing. Even if your 401k has relatively high fees, the extra return provided by your employer’s contribution should more than make up for them.
Next, max out your IRA.
If you meet the income requirements to be eligible to contribute to an IRA, that’s likely the best place to go with your money after maxing out your employer match. You’ll likely be able to find an online brokerage that will allow you to open a no-annual-fee IRA and invest in the same funds available to you via your 401(k).
Try to get the fees lowered.
If your employer’s 401(k) has particularly high fees, it could very well be worth it to bring it up with your HR department. You’ve got nothing to lose (and tens of thousands of dollars to gain). To help your chances, be sure to point out to your HR contact that the fees are costing them money too.

The big lesson

Investment costs have a very significant impact on your long-term returns. Regardless of where you’re investing or what you’re investing in, it’s well worth your time to find out how much you’re paying in investment costs and to see what you can do to minimize them.

About the Author: Mike writes at The Oblivious Investor where he reminds readers to ignore the day to day noise in the market. If you like this post, please subscribe to his blog for free daily updates.

Tagged as: 401k, Investing

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{ 1 comment… read it below or add one }

ctreit April 24, 2009 at 1:35 pm

These fees can really cut into the long-term performance of a 401(k) plan. Unfortunately it is also quite difficult to get the exact fees an employee is paying since there are so many different fee arrangements for 401(k) plans. I am glad that the house introduced a 401(k) fee disclosure bill so that investors understand the total cost of servicing the 401(k) money easier. Not that a single employee can do much about higher fees, but knowing about them is a good first start to get them lowered.

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