What You Can Do If Your 401(k) Has High Fees

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Now that we’ve all been receiving 401(k) plan statements that include information about the fees associated with our accounts, what should you do with that information?  Some 401(k) plans have fees that are upwards of 2% annually, and these fees can introduce a tremendous drag on your investment returns over a long period of time.

There are two components to the overall cost of your 401(k) plan.  The first, and the easiest to find, is the internal expense ratios of the investments in the plan.  Recent information shows that, on average, these investment fees are something on the order of 1% to 1.4% or more.  The second part of the costs is the part that has recently begun to be disclosed: the plan-level fees.  These are the fees that the plan administrator has negotiated with the brokerage or third-party administrator to manage the plan.  These fees can average from 1% up to around 1.5%.  When added together, these fees can amount to nearly 3% for some smaller 401(k) plans.  Larger employers’ plan fees average about 1% less, at approximately 2% per year.

For example, if average investment returns are 8% you should be doubling your investments (on average) every 9 years.  However, if there is just a 1% fee deducted from the average investment return (so that now you’re only earning 7% annually) the doubling will take a bit more than 10 years.  A 2% fee brings you down to a 6% net average return, and so now your account won’t be doubled until 12 years has passed.  If you started our with $10,000 in your account, this would result in a differential of more than $42,000 over the course of 30 years – at 8% your account could grow to $100,627, while at a 6% return would only grow to $57,435.

The information about fees used to be kept pretty much secret, but beginning in 2012 the plan-level fees have begun to be disclosed to participants in the plans.  Now you know more about the overall fees that are charged to your plan and thereby reduce your overall investment returns.

What Can You Do?

So, now that you know what your expenses are in your 401(k) account, there are a few things that you might do to improve the situation.  While it’s unlikely that you can have an impact on the plan-level fees, you may be able to control some of your exposure to investment fees.  Listed below are a few things you can do to reduce your overall expenses in your 401(k) account.

1. Lobby for lower fees.  Talk to your HR representatives and request that your plan has lower-cost options made available.  Index funds can be used within a 401(k) plan to produce the same kinds of investment results as the (often) high-cost managed mutual funds, with much lower expense ratios.
2. Take in-service distributions, if available.  If your plan allows for distributions from the plan while you’re still employed, you can rollover some or all of your account to an IRA, and then choose lower-cost investment options at that time.  Typically a 401(k) plan may offer this option only to employees who are at least 59½ years of age – but not all plans offer in-service distributions.
3. Balance the high-fee options with lower-cost options outside the plan.  If your 401(k) plan is unusually high-cost, if available do the bulk of your retirement investing in accounts outside the 401(k) plan, such as an IRA or Roth IRA, if you are eligible to make contributions.  Review the investment options in your 401(k) plan for the “diamonds in the rough” – such as certain institutional funds with very low expenses – that can be desirable to hold.  Then complete your allocations using the open marketplace of your IRA or Roth IRA account.

Don’t forget that there are sometimes very good reasons to leave your money in a 401(k) plan, even if the expenses are high.  See the article Not So Fast! 9 Special Considerations Before Rolling Over Your 401(k) for more information on why you wouldn’t want to make a move.