401(k)s Aren’t Free: Why You Should Pay Attention to Fees

If you’re offering your employees a 401(k), you’re providing them a valuable retirement benefit. However, in our employee education and enrollment meetings, we’ve found that many employees mistakenly believe their 401(k) is free. In reality, most plans charge administration fees, and sometimes investment fees as well, out of the money employees contribute.

Understanding what fees you pay is a key part of smart financial planning, since even a small fee can significantly affect how much you accumulate over time.

That’s why it’s important to review your plan’s 408(b)(2) fee disclosure to understand exactly what fees apply to your plan. Consider the following hypothetical example published by the United States Department of Labor:

Assume you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even with no further contributions. If fees and expenses are 1.5 percent instead, your account balance will grow to only $163,000. That 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.[i]

This example is hypothetical and provided for illustrative purposes only. It does not reflect the experience of any actual client or investor, is not indicative of future results, and should not be interpreted as a projection or guarantee of investment performance. Actual results will vary based on numerous factors, including market conditions, contribution levels, investment selection, and the specific fees charged by a given plan. Assumed rates of return do not reflect the deduction of investment advisory fees unless otherwise noted, and fees will reduce actual returns.

As we wrote about last week, employers who offer a 401(k) plan have a fiduciary obligation to monitor the fees that employees pay. Beyond that fiduciary obligation, employers should consider the real impact fees can have on their employees’ ability to save for retirement, as well as their own ability to do so if they participate in the plan.

In our experience, many employers don’t fully understand their fee disclosures, or simply aren’t focused on their current plan’s costs. However, it’s important for employers to continually monitor their plan to ensure they’re paying the lowest fees reasonably available. A plan provider that was the best option a few years ago may no longer be the most cost-effective choice today, as plan assets grow and the marketplace changes.

For example, we were recently able to help a 401(k) plan client save 0.75 percent in fees by comparing their current plan costs to proposals from other providers. While 0.75 percent may not sound like much, consider the following hypothetical illustrations:

For an employee with $200,000 currently in the plan, contributing $5,000 per year, a 0.75 percent fee reduction could result in estimated savings of:

• $17,000 over 10 years
• $40,000 over 20 years
• $102,000 over 40 years

For a plan with $2,000,000 in total assets and $50,000 in annual contributions, a 0.75 percent fee reduction could result in estimated savings of:

• $178,000 over 10 years
• $417,000 over 20 years
• $1,032,000 over 40 years

The figures above are hypothetical examples used for illustrative purposes only. They are based on assumed account balances, contribution amounts, and a fixed fee differential, and do not reflect any actual client’s account, an actual investment recommendation, or a guarantee of future performance. These examples do not account for the effects of investment growth, market volatility, taxes, withdrawals, or changes in contribution amounts over time, all of which will affect actual results. Actual fee savings will vary by plan and cannot be predicted or guaranteed.

Fee disclosures can be difficult to interpret, and some fees can be hard to identify even when you know to look for them. Working with an advisor who can help you read fee disclosure documents and understand the impact fees have on you and your employees can be a significant help in meeting your fiduciary obligations.

This material is for informational and educational purposes only and does not constitute investment, legal, or tax advice. It should not be relied upon as the basis for any investment decision. Legacy Financial Strategies is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. Please consult with a qualified financial, legal, or tax professional regarding your individual circumstances before making any decisions.

[i] A Look at 401(k) Plan Fees. The United States Department of Labor.