Common 401(k) Fee Structures

401k Options Before Retirement
All 401(k) providers impose fees on top of fund expenses, and smaller companies are the ones who are charged the most.

"The fact is, the financial-services industry isn’t donating its services and doing all this work," says David Wray, president of the Profit Sharing/ 401(k) Council of America.

What are the fees associated with your 401(k)?

43-year-old Max Johnson of Charleston, S.C., recently logged into his 401(k) account to redistribute some of his portfolio holdings. His intent was to shift assets out of the aggressive funds he was currently holding and to put them into index funds instead. Jonathan couldn’t believe how much the move would cost him. To invest in the low-cost Vanguard funds offered in his plan, the plan provider would charge him with a 2.69% annual asset-management fee.

Looking deeper into his plan’s fee structure, he discovered that his 401(k) provider charged additional fees (beyond the fund’s expense ratio) on all mutual funds, ranging from 1.29% on the funds with the highest expense ratios to 2.69% on those with the lowest. He was told that the reason was to cover the costs of the plan, including having a toll-free number, Internet access, investment options from different fund families and broker commissions. Johnson was shocked.

Just how much a company will pay for a 401(k) plan depends on the number of plan participants and the size of their account balances, Wray explains. Chalk it up to economies of scale: Large companies will bring in more assets than smaller ones, so the cost of running these accounts is dramatically lower. The smaller the company and the lower the account balances within the plans, the more it will cost.

The good news is that many employers cover these costs on behalf of their employees. More than half of the companies surveyed in Hewitt Associates’ "2005 Trends in 401(k) Plans" report said they cover the various fees associated with 401(k) plans. (The survey focused on large companies with an average 14,000 employees.) If you work for a smaller company, though, chances are your 401(k) plan will carry higher investment costs and have fewer investment choices.

What can you do?

The first step is to speak with your plan administrator to get a better feeling of what fees you may be paying for your 401(k). If you feel the fees are excessive, you sometimes will have the option of rolling your 401(k) to an IRA (Individual Retirement Account) via a process known as an "in-service distribution."

If you don’t have this option, you’ll have to sit tight and focus on ways to increase your 401(k)’s value – and in essence ignore the fees that you may have little or no control over.