Do you know how much you are paying in fees each year with your 401K plan? Most investors don’t. I certainly didn’t always know this information. But over the last few years, I’ve discovered that 401K fees can be fairly significant, and can vary greatly based on the 401K administrator and the individual investments you are using.
How significant? Well, if your 401K fees are just a percentage point higher, it could literally mean hundreds of thousands of dollars of difference in the total return your retirement account generates. This also applies to you if you’re running your own small business and trying to find a small business 401K plan for you and your employees. It’s important to know what your paying. But before we delve into calculating your 401K fees, let’s look why these fees are so hard to pinpoint.
Why Are 401K Fees So Hard to Find?
Simply put, 401K administrators make it hard to find fees. And before you think I’m picking on 401K’s, it applies to Roth IRA and Traditional IRA fees as well. When you first go searching for your 401K plan fees, it can be pretty frustrating. It’s not like your 401K administrator or employer sends you a bill at the end of the year that says here’s how much you owe us for managing your retirement. Wouldn’t it be nice if they treated us this way? But they don’t. My opinion is that this setup is a result of the transition from employer-controlled pension funds to employee-directed 401K plans.
Back when there were no 401K plans, there were pension funds. Employers controlled everything with regard to your retirement assets. When the 401K was created, investment companies stepped up to fill the gap as administrators. They, along with the company, set the rules about how to report information to you. Unfortunately, this meant making expenses an afterthought in their communications with employees. And as long as they (employees) weren’t asking, the employers and administrators weren’t talking about the expenses.