The cost of investing in your 401(k) plan at work is hitting new lows. Too bad hidden fees can chomp away at your savings.
Generally, it's cheaper to invest in your retirement plan at work, versus going out on your own to shop for mutual funds.
For example, the average expense ratio for an equity mutual fund in a 401(k) plan was 0.39% in 2019, according to the Investment Company Institute. In comparison, the general average expense ratio for equity mutual funds was 1.24%.
Investors are also generally paying less to invest in their plans now than in previous years: Back in 2000, plan participants were paying an average expense ratio of 0.77% for a stock mutual fund in their 401(k).
Nevertheless, the cost of investing tells only part of the story.
Participants are still shelling out for other plan expenses — and they continue to dig into their pockets for one-off costs, including distribution fees once they pull cash from the 401(k).
Even splitting a retirement plan account in accordance with a divorce settlement — known as a qualified domestic relations order — carries a fee that ranges from $200 to $500, according to new data from Human Interest, a plan provider specializing in small to medium-sized businesses.
"This is a place where there are a bunch of hidden fees, and what can you do as an employee?" said Jeff Schneble, CEO of Human Interest. "Not a lot."
There are two major drivers behind falling investment expenses in 401(k) plans in recent years.
First, back in 2012, the Labor Department mandated fee disclosure for retirement plans.
That effort required plan service providers to formally divulge their costs to employers, so that plan sponsors could ensure the fees were reasonable.
Employers are also required to provide 401(k) investors with fee disclosures at least annually. Check with your benefits representative if you haven't received one. You're likely able to access it online through your plan's recordkeeper or you may receive a disclosure on paper in the mail.
Second, plaintiffs' attorneys began pursuing large retirement plans in court. The lawyers would allege that employers breached their fiduciary responsibilities by choosing costly investments that underperformed other low-cost funds.
Even with those developments, high costs may still lurk — particularly for plans with fewer assets and less bargaining power. Businesses with higher asset levels tend to be eligible for institutional pricing, which helps keep costs down.
For instance, total plan costs can vary from 0.38% for the largest plans to 1.42% for the smallest plans, according to an analysis of 22,000 retirement plans conducted by Morningstar.
Small plans — those with less than $1 million in assets — can have investment expenses as high as 0.95% and plan expenses of 0.47%, Morningstar found.
You don't hear much about check fees and other one-off expenses from retirement plans because they depend on specific events at the employee level.
"Those fees don't get headlines because that's not what 401(k) lawsuits are focused on," said Aaron Pottichen, senior vice president at Alliant Retirement Consulting in Austin, Texas.
"These one-off fees are based on specific actions employees take as opposed to being in the plan," he said.
But those expenses could sting for savers with smaller balances or for retirees who kept their savings in their 401(k) and draw down a check every month.
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"A younger investor with $1,000 saved who's being charged $50 here and $25 there — that could be your entire return if you're earning 5%," said Tony Isola, a certified financial planner at Ritholtz Wealth Management in New York.
What a service provider charges for a task, like reversing an excess contribution to a 401(k) plan, will vary from one company to the other.
"For some of these transactions, there's legitimate work that needs to be done behind the scenes to make sure the paperwork is correct," said Pottichen. "Distributions, loans, hardship withdrawals and qualified domestic relations orders have the highest fees."
Employers ultimately are responsible for choosing vendors, but employees should keep themselves informed of extra fees that might ding their accounts.
"The vendor has a fee schedule for these one-off fees and expenses, and it's usually a document that will be provided to the participant," said David Blanchett, head of retirement research at Morningstar Investment Management Group.
Still, if you're retiring, and you'd rather avoid a monthly fee for taking a distribution, talk to your employer.
"Go to your recordkeeper or your employer and ask how you can erase the fee if you're taking periodic distributions for income," said Pottichen.
"Plan sponsors want to keep assets in the plan because if they have higher balances, it helps bring down costs," he said.