401(k) fees can cost the average American hundreds per year. What you need to know

October 4, 2022, 12:00 PM UTC
Financial adviser in discussion with client
Your financial adviser can explain the fees you’re paying for your 401(k) plan.
Thomas Barwick—Getty Images

There’s a cost to saving for retirement: management fees.

In 401(k) retirement plans, management fees are assessed as a percentage of the investment and are paid directly from the plan itself. Overpaying for these expenses substantially reduces your overall retirement income and can come back to bite you in the future. 

To shed some light on average 401(k) fees, the Investment Company Institute recently gathered data on the typical cost for large 401(k) plans from the Department of Labor. It found that the average 401(k) participant was in a lower-cost plan with a total plan cost of 0.55% of assets. 

This means if you have $141,542 invested in your 401(k), which is the average account balance held by Americans, then you can expect to pay over $778 in fees annually. The amount charged is used to pay for the cost of the investment itself and the plan’s administration and service fees.

But the amount also differs depending on the investments held in the portfolio. For instance, index funds are one of the most common passive investment vehicles, which results in a lower fee for the investor. 

On the other hand, some funds are actively traded in an attempt to outperform the benchmark, which costs more since someone is spending additional time analyzing and trading within the portfolio, says Zachary Bachner, a certified financial planner for Summit Financial

That said, the cost of a fee isn’t always the most important detail regarding an investment. “Higher fees might mean lower returns, but the fee may be worth it if your account outperforms,” says Bachner. Nevertheless, the fees charged add up over time and can reduce your overall savings. 

The U.S. Department of Labor (DOL) cites an example: An employee with 35 working years left has a current 401(k) balance of $25,000 that earns an average return of 7%, but pays 0.5% for fees. By the time they retire, their account balance will reach $227,000, even if they make no further contributions to their account. 

On the other hand, if their fees increase to 1.5% with all else the same, the account will grow only to $163,000 over those 35 years. So this seemingly insignificant 1% increase in fees actually reduces the overall account balance at retirement by 28%, according to the DOL, which can be detrimental to retirees living on a fixed income. 

Fees within 401(k) plans can vary greatly among plan providers and investment options, so it’s important to review this information regularly to ensure you are getting the best return on your savings. You can find information on the fees and expenses you pay by looking at the annual statement for your 401(k) plan or by contacting your plan’s administrator. 

“We always recommend meeting with your personal financial adviser if you are concerned with overpaying in fees within an employer provided retirement plan,” says Bachner. 

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