Financial experts agree: Employer-sponsored 401(k) plans are one of the best retirement savings tools. Americans have $5.7 trillion invested in employer-sponsored 401(k) plans, according to the Investment Company Institute. That’s about 20% of the total retirement pie in the U.S.
But despite their widespread use, many people don’t understand how 401(k) plans work, especially when it comes to the cost of these retirement savings accounts. Over a third of U.S. investors think that they don’t pay any fees on their account, a 2018 survey found.
Yet almost all 401(k) investors, a whopping 95%, pay fees associated with their 401(k), according to an analysis by TD Ameritrade and online fee analysis tool FeeX.
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The average all-in cost of those fees is 0.45% of the total invested assets, according to a recent analysis of fee data from those who used the 401(k) Fee Analyzer tool. TD Ameritrade crunched the numbers in July and provided the data exclusively to CNBC Make It.
That means if you have $103,700 invested in your 401(k), which is the average balance among Americans, you can expect to pay about $467 a year in fees. Those expenses range from expense ratios – the actual cost of investments, such as mutual funds and ETFs – to plan administration fees and individual service fees.
“A 401(k)s is a very powerful way to save for retirement, but you really should understand all the underlying fees and expenses as you save for retirement and make sure you’re getting the most for your money,” Dara Luber, senior manager of retirement at TD Ameritrade, tells CNBC Make It.
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Any money you put in a traditional 401(k) comes straight from your pay before taxes are applied, so it reduces your taxable income. Experts like 401(k)s because of this tax benefit and, many times, employers will match your contribution, adding extra savings to the pot. Plus, your contributions are automatically deducted from your paycheck, so you won’t be tempted to spend them.
When and why 401(k) fees matter
The biggest factors in the cost of your 401(k) are the size of your company and the plan it uses, David Blanchett, head of retirement research for Morningstar’s Investment Management group, tells CNBC Make It. The average total plan fees range from 0.37% for the largest plans to 1.42% for the smallest plans, his research found.
Those fees can add up, and in some cases, they’ve been found to eat away at the benefits of a 401(k). A comprehensive 2015 academic study found that in 16% of 3,500 plans analyzed, fees were so high that they “consume the tax benefits of investing in a 401(k) for a young employee.”
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If you’re worried your 401(k) fees are too high, Blanchett suggests talking to your HR department or your plan manager. To bring down the cost, you can ask them to add more index funds to your plan’s investment options. These are typically low-cost and are generally considered to be a reasonable request, Blanchett says.
No matter what you’re paying, Blanchett says it generally still makes sense to invest in your 401(k). “I don’t know that knowing the plan expenses really affects people’s decision to invest because a 401(k) is a pretty awesome way to save for retirement,” he says.
Yet understanding plan fees becomes critical when you’re debating what to do with a 401(k) once you leave a company. At that point, you typically have the option to roll it over to an individual retirement account, move the money to your new employer’s 401(k) or leave the funds at your old employer’s 401(k). You could cash it out, but Luber says that option “certainly should be a last resort for most people.”
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If you were at a big company and the 401(k) plan offers a lot of investment options and inexpensive fees, it could make sense to keep it there, Blanchett says. But, “if you’re at a smaller plan where it costs 2% a year, you’re probably better off rolling it into an IRA,” he adds.
Keep in mind that unless you know you’re in a plan that’s “egregiously expensive,” there’s no rush to decide what to do with your 401(k), so you have time to do your homework. You can use a tool like FeeX to see how your current 401(k) plan fees stack up and then decide the best next steps.
“Gaining visibility into your 401(k) is the first step in making the most of your retirement savings,” Luber says.
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