What 401(k) fees really cost

Every retirement account has costs. In a 401(k) they are easy to overlook because they are usually deducted from the account or from investment returns rather than billed to you. Knowing what you pay is useful on its own, and it matters most when you are comparing an old plan with a new plan or an IRA.

The three main types of 401(k) fees

• Plan administration fees. The cost of running the plan: recordkeeping, statements, websites, legal and accounting work. Some employers pay these. In other plans they are charged to participant accounts.
• Investment fees. The cost of the funds themselves, usually shown as an expense ratio. This is often the largest share of what a participant pays.
• Individual service fees. Charges for optional features you choose to use, such as taking a plan loan.

Reading an expense ratio

An expense ratio is an annual percentage of the money you have in a fund. A fund with a 0.50% expense ratio costs about $5 a year for every $1,000 invested. A fund at 1.00% costs about $10. The fee is taken from the fund's returns, so it does not appear as a separate line on most statements.

Where to find what you pay

• The plan's annual fee disclosure. Plans covered by U.S. Department of Labor rules give participants a notice listing plan-level fees and the expense ratio of each investment option.
• Your account statement. Statements show fees that were actually deducted from your account during the period.
• Fund fact sheets or prospectuses. These list each fund's expense ratio.
• The plan administrator. If you cannot find a number, you can ask for it.

Why small percentages add up

A fee charged every year compounds, just as returns do. Here is the arithmetic for a balance with no new contributions: if one account costs one percentage point more per year than another holding the same investments, it would be worth about 18% less after 20 years and about 26% less after 30 years. That relationship comes from the fee difference alone and is the same whatever the markets do.

IRAs have costs too

Moving to an IRA changes the fees; it does not remove them. An IRA may involve fund expense ratios, trading costs, account fees and, if you work with an adviser, an advisory fee. Some large employer plans offer institutional pricing that may be lower than what an individual can get. Some IRAs may cost less than a small or expensive plan. The only way to know is to compare the numbers.

Questions worth asking

• What is the total annual cost of my current plan, in percent and in dollars?
• What would the total annual cost be in the account I am considering?
• What do I receive for the difference, such as advice, planning or a wider choice of investments?
• Are there any charges for moving the money out or in?

Lower cost is not automatically better and higher cost is not automatically worse. What matters is knowing the number and deciding whether what you get for it is worth it to you. The U.S. Department of Labor publishes free booklets on plan fees on its Employee Benefits Security Administration publications page.