Financial Literacy

How to Decode 401k Fees

People are generally unaware of the fees attached to their 401k. Even when they are, that awareness is usually limited. Those fees can get pricey though, and many of them are hidden or difficult to suss out.

To help you stay on top of your money, we’ve put together information on finding and mitigating those fees.

Awareness of Fees

According to a survey of active plan participants by the National Association of Retirement Plan Participants (NARPP), 58 percent of people surveyed said they didn’t know that they were paying fees on their workplace savings plan, and even among those who did know, only a quarter correctly identified how those fees are calculated. On average, 401k fees take about 1% of portfolios. Seems small right? Maybe, but that amount could result in hundreds of thousands of dollars lost over a few decades.

In a separate study from AARP, 32 percent of people surveyed said that they are not aware that fees could hinder their 401k’s returns and affect how much they’ll have for retirement. Finance is a game of knowledge, and this is a significant blind spot for a large portion of investors.

How are Fees Hidden?

Legally, 401k fees are not supposed to be hidden from plan participants. But going over 401k documents requires time, patience and financial knowledge – commodities in short supply for most.

Since most people rarely look at their statements, they may be unaware of how much fees take from their returns. Plus, with average credit card interest rates at 17%, a fee of 1% may seem insignificant.

Tack that on to the fact that while companies aren’t allowed to hide their fees, they also aren’t required to print them in shiny, bold letters. In other words, they may not be hidden so much as tricky to spot right away.

Fees to Look Out For

401k plans include a variety of fees. The most common are:

  • Administration fees: These are responsible for the costs of maintaining the fund, including legal expenses, customer service and more.
  • Investment fees: These pay for the cost of the fund’s investments.
  • Sales charges: These are applied when shares are bought or sold. They’re also referred to as commissions or loads.
  • Individual service fees: These fees apply to investors who choose optional features, such as taking a 401k loan.
  • Management fees: These fees pay for the costs of managing and maintaining the fund. 401ks with more active management will have higher fees, while passive funds will have fewer fees.
  • Marketing fees: Also known as 12b-1 fees, marketing fees are assessed for the cost of branding the fund.

How to Be On Top of Your Fees

Before you sign up for a 401k plan, look at the fees associated with each investment. Employers are required to share all fees associated with funds so you can make an informed decision. You may have to read carefully, but make no mistake – the fees are listed.

While some high-fee plans also have high returns, see how they stack up with low-fee plans. You can compare plans at websites like BrightScope. They’ll be able to show you if those fees are leaning towards better-performing funds.

At the end of the day, there’s no point in celebrating high returns if fees are eating away at your bottom line. Educate yourself, read the fine print and get the most from your investments.

Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Debt Free After Three.