401(k) · Fees

401(k) Fee Drag

Fees make me grumpy.

Given how much financial providers attempt to hide or obscure fees, I’m guessing I’m not the only one. Fees bite into my future retirement and are paid regardless of whether my investments do well or not.

Investment Fees

The first fee in my 401(k) plan that makes me grumpy is the expense ratio associated with each investment option. In my plan, the most expensive is a small/mid cap mutual fund at .82%, and the least expensive .05% for a S&P 500 index fund. The so-called “target date” funds all have expense ratios of .29%.

Over a 30-year period[1], fees can add up. Ignoring inflation and assuming a $19,500 annual contribution with an annually-compounded 7% return, I can see the long term effects of those fees:

My most expensive option differs from the lowest expensive by nearly a quarter of a million dollars by year thirty, a nearly 15% loss. The target date funds aren’t quite as costly, only differing by about $75k for a 4% difference. Investment fees matter.

When I first enrolled in the plan, the company was smaller and my 401(k) plan had higher expense ratios across the board. The least expensive index fund was .50%, crazy high in my book. As plan assets reached higher values, fees fell.

Here’s a screenshot of where I can compare investment fees across my 401(k) options:

There’s a column to the far right that lists the Investment Expense percentage. These numbers can vary over time. 

Plan Administrative Fees

The next 401(k) fee that makes me grumpy is the plan fees, separate from the investment fees. Unlike my previous employers who covered the 401(k) plan administration fees, my current employer does not. I was blissfully unaware of how high those fees could be. I discovered these fees when I noticed that each month a portion of my shares in each investment kept “vanishing”.

In my plan, the administration fee has changed over time, presumably when the plan assets have reached higher amounts. Last year my plan charged a .75% administrative fee and this year it’s dropping to .70%. My company has grown and the total fees are spread across more people and more money. Compared to having an IRA at a discount broker with no plan fee, this .70% fee feels crazy high to me.

Here’s a look at the impact of the combined administrative and investment fees using the same options in the earlier graph:

The plan fee has real impact on even my least expensive option, over $230k less by year 30, nearly 13% less than the no plan fee option. This number may be high if the plan fee keeps going down, but the impact will likely still be significant.

Here’s a screenshot of where I go to see my plan’s administrative fees. The fee seems to be deducted monthly but is only reported on a quarterly basis:

What Can I Do?

Step 1: I can make myself aware of the investment fees for the funds I’m using in my plan. My employer defaults employees into one of the “target date” options, which might not be the best choice for me. Many target date options can be synthesized from other plan options, combined with annual re-balancing. For example, combining a S&P 500 index fund with a .05% investment fee and the cheapest bond index fund with a .16% investment fee will always beat the .29% “target date” funds, no matter the ratio, and likely give the same risk and return.

Step 2: I can ask my employer to match contributions. My last employer stopped matching. Combined with my current 401(k), it’s been 5+ years since I’ve had a match. Missing a match adds up over time, especially the lost compounding.

While a match wouldn’t negate the fees, it would make them more palatable. When asked, my employer tells me that they’ll match as soon as we’re profitable. I get that it’s important to curb expenses, but they aren’t waiting until profitability to pay salaries and bonuses. I’m not sure what makes a 401(k) match so different. I don’t have control over the dial between growth and profitability, and their answer feels the same as saying “never”.

Step 3: I can increase my employer’s awareness of my frustration with the 401(k) plan fee. The disconnect between the employer making the 401(k) provider decision but not footing the bill surely leads to higher plan fees. It’s kinda like choosing where to go out to eat but not needing to worry much about the tab because someone else is picking it up.

Step 4: Don’t rollover funds from previous employers into my current plan. I understand that the plan fees can go down as plan assets increase, but I’m better off with rolling over 401(k) assets from previous employers into an IRA with low investment expense ratios and no plan fees. I’m not sure I can stress how bad of an idea that would have been in the long haul, regardless of the impact on my current plan fees. Not taking one for the team here.

Step 5: I don’t know when I’ll leave my current employer, but when I do I’ll stop the bleeding caused by these fees by rolling over my 401(k) into an IRA immediately. The paperwork is not complex or scary, most IRA providers help you through it, and it’s financially crazy to leave it in a plan with such high fees and limited options. I’ve had success with my IRAs at Vanguard so that’s where it will likely go.

Conclusion

Have you pulled back the covers on your 401(k) fees? What did you find? What do you plan on doing about beyond the steps I’ve taking? I’d love to hear from you.

Hasta luego.

Footnotes

  1. While this might be a long time to stay with one employer, many people don’t move their money when they leave an employer and will face these fees for years.

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