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Understanding and Managing 401(k) Fees

One popular retirement savings tool is the 401(k). These employer-sponsored plans offer unique tax benefits, and your employer might match some or all of your contributions—but 401(k) fees come with the territory. That could eat into your savings and deplete your nest egg. Understanding your plan’s fee structure can help you minimize or avoid 401(k) fees.

What Are 401(k) Fees?

Your plan may charge administrative fees and other 401(k) fees for managing your investments. A 401(k) is a relatively hands-off retirement account that allows you to invest in all sorts of assets. Investment options generally include a mix of:

• Index funds
• Target-date funds
• Bonds
• Mutual funds
• Exchange-traded funds (ETFs)

If you don’t select specific investments, your plan administrator will likely choose them for you based on your retirement timeline. Target-date funds, for example, will invest in a way that’s appropriate for your age, then automatically rebalance to become more conservative as you approach retirement. Investing in your 401(k) can help grow your wealth over time, but it comes at a price. If left unchecked, 401(k) fees can take a bite out of your retirement savings.

Types of 401(k) Fees

Fees for 401(k)s generally fall into the following categories:

Investment Fees

These fees go toward managing the plan’s investments. For example, if your 401(k) holds mutual funds or ETFs, you may have to cover their expense ratios. Investment fees are usually expressed as a percentage of plan assets and deducted from investment returns.

Plan Administration Fees

These fees cover basic services like accounting, record keeping, legal services, and more. Some 401(k)s also provide access to educational resources, retirement planning software, and other extra perks. Administrative fees may be paid by the plan sponsor or the participant.

Individual Service Fees

Some plans charge extra fees if participants use certain plan features, like taking out a 401(k) loan.

How to Check Your 401(k) Fees

Plan administrators are required to disclose all 401(k) fees. You can find this information in your plan’s prospectus, which is updated annually. This is a legal document that provides important information for investors. You can also look at your 401(k) statement. Either way, fees for each investment should be clear. Look for the following keywords:

• Total asset-based fees
• Expense ratios
• Total operating expenses

If you’re still unsure about your 401(k) fees, reach out to your plan administrator for clarification.

How to Lower Your 401(k) Fees

Your plan’s administrative fees are out of your control, but you might be able to reduce or avoid other 401(k) fees.

• Look at the fees for each investment. This can help you understand which ones are costing you the most money.
• Review your investment strategy. Your investment approach should be guided by your age, risk tolerance, and financial goals. A financial advisor can weigh in with personalized investment advice.
• Consider other investments within your 401(k) plan. Mixing up your asset allocation could result in lower fees. Just make sure your choices are aligned with your investment strategy.

Frequently Asked Questions

Do Employers Pay 401(k) Fees?

Employers may cover some administrative fees, but investment fees are typically borne by the participants.

Are 401(k) Fees Tax-Deductible?

401(k) fees are generally not tax-deductible.

What Are Typical 401(k) Fees?

Typical 401(k) fees can range from 0.5% to 2% of plan assets annually.

Why Do 401(k) Fees Matter?

401(k) fees matter because they can significantly impact your retirement savings over time. Lower fees mean more money stays in your account, benefiting from compound interest.

The Bottom Line

It’s difficult to avoid 401(k) fees, but adjusting your investment strategy could help you keep more money in your savings. Building your nest egg is a long-term process—and thanks to the power of compound interest, every dollar that’s invested matters.

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