Written by Phil DeAngelo, Focused Wealth Management
401(k) retirement plan fees may appear negligible at a few pennies on the dollar. However they add up to a colossal amount of money for your nest egg over the span of your entire career. The vast majority of the 53 million people who take part in an work-sponsored 401(k) plan in the U.S. don’t know how much they’re paying in annual expenses and that they could be paying a lot less. If they do know about the high fees, it’s tough to complain for fear of offending the one who signs the paychecks.
Participants typically pay a management fee of 0.67% of assets annually for 401(k) retirement plans, according to research conducted by the Investment Company Institute and Deloitte Consulting. Fees tend to decline the larger the plan. Group retirement plans with $1 million to $10 million in assets under management pay an annual expense ratio of 1.27% on average. Plans with $10 million to $100 million in assets under management, 0.82%; $100 million to $500 million, 0.57%; and $500 million and up, 0.37%. Smaller plans end up paying higher rates owing to the fixed costs of administering the plan, the report found. Employees typically pay 87% of 401(k) costs.
I recommend using the free calculator at 401kfee.com to figure how fees will affect your nest egg in the long run. Let’s say you start with $10,000 in a 401(k) plan, contribute $10,000 each year and make an average investment return of 7% each year over two decades. The calculator reveals you would save $769 a year in a plan that charges an expense ratio of 0.67% annually versus a plan that charges 1.27%. After 20 years, your plan would total $415,304 if you paid the 0.67% yearly management fee versus $387,832 if you paid 1.27%. That’s a $27,472 difference. After 30 years, the difference mounts to $93,890 and after 40 years, an eye-popping $259,213.
(Courtesy: 401kfee.com)
Plan fees mostly come from the management fees of the mutual funds offered in the program. Actively-managed funds are more expensive than index funds. Actively-managed mutual funds carry an average annual expense ratio of 0.92% versus only 0.13% for index funds, according to ICI
. The tinier the 401(k) plan, the less likely it offers index funds. Ninety-seven percent of plans with $1 billion and more in assets under management offer at least one index fund. Whereas only 79% of those with $1 million to $10 million and about two-thirds of plans with under $1 million have index funds.
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