How to Know if Your 401(K) Fees are Reasonable

Image: How to Know if Your 401(K) Fees are Reasonable

A 401(k) savings plan is a cost-effective way to offer flexibility to both the employer and the employee—and there are a lot of Americans saving with these plans. Roughly 54 million Americans hold an estimated $5.3 trillion in assets in 401(k) plans, and that number is on the rise.*

To keep this many plans running smoothly, specialized services are required—which come with associated fees. From consulting and advising to recordkeeping and administration, these fees ensure that your business’ 401(k) plan is compliant and its investments are appropriate. But how do you know if the fees you are being charged for your 401(k) are reasonable?

Because 401(k) plans can differ, so will their fees—so assessing what’s “reasonable” depends on the types of services your plan provides. For example, a plan that offers employer contribution matches or profit sharing may cost more to administer and will likely have more fees. Other plans with more basic additional features will likely have fewer fees.

While cost is an important factor to bear in mind, the cheapest 401(k) plan might not always be right for your business. Consider plans with features and benefits that align with your company values and culture.

Learn more: How to Evaluate a 401(k) Plan Provider


Where to find 401(k) fee allocations

The plan sponsor or an investment committee should have a good understanding of the fees associated with the retirement plan. It’s their responsibility to ensure that each participant receive both the plan-level and investment-related information, including fee information, before their initial investment and annually thereafter.

If you aren’t clear about what types of fees you’ve been charged, review your 408(b)(2) form. This form describes the services provided to your plan, which can make it easier for you to assess the “reasonableness” of the fees paid. To alleviate doubt, review the plan and associated fees regularly. Industry experts suggest doing a more in-depth review every three years. When reviewing your fees, trust your gut—if you feel like something is too expensive, it often is. You likely won’t be an expert at determining the reasonableness of your fees straight away, but doing some initial research can help.

To keep plan participants up to date, the law requires that a 404(a)(5)—a record of fees that includes the cost of investments, administration, and recordkeeping—is provided annually. Plans should also be reviewed each year to ensure all participants are on track to meet their 401(k) retirement savings goals.


Finding a 401(k) provider with reasonable plan fees

Fees are a part of every 401(k) plan, but some fees are more excessive than others. When deciding on a retirement plan, plan sponsors should align themselves with 401(k) service providers or third-party administrators that endorse “full disclosure” principles, where all fees will be clearly identified up front for both the plan sponsor and the participants.

When you begin assessing your 401(k) fees and determining if they’re reasonable, don’t be afraid to ask questions. It’s important to stay educated on what the fees mean, what services they cover, and how they can affect the overall health of your plan.


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*Lee Barney. “401(k) Participants’ Equity Holdings Drop As They Age.” Planadviser. January 24, 2018.