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Enrolling in a 401(k) is a great way to save for retirement. What many don’t realize, however, is that doing so often comes at a cost—and it’s not just employers left holding the bag.

Last year, an industry survey found that over a third of 401(k) participants believed they didn’t have to pay for their accounts. Of those who knew about the fees, only 27 percent actually had a rough idea of what they amounted to.

From the investment managers moving your money around, to the back offices handling compliance and recordkeeping, everyone wants a cut. The Department of Labor divides 401(k) fees into three categories:

  • Investment Fees: Behind the scenes, investment managers are managing your 401(k) funds to help maximize potential gains. While investment fees are typically charged as a percentage of assets, these may vary based on whether the funds are actively or passively managed. Fees will almost always be charged by the mutual funds you are invested in, but you may also have a financial advisor fee charged on top of that by the advisor to the plan. In most cases, investment fees account for the largest share of 401(k) fees overall.
  • Administration Fees: 401(k) plan administrators have a lot on their plates. These third-party providers are responsible for various tasks such as day-to-day administration, recordkeeping, reporting, and compliance testing. For all of this, administrators will charge a fee—often a flat rate per participant or a percentage of assets under management. While employers will sometimes cover these costs on employees’ behalf, they are not required to.
  • Individual Service Fees: Providers will often charge participants for special one-off services, like distributing funds, processing a 401(k) loan, or processing a Qualified Domestic Relations Order.

On top of these costs, plan participants may also be subject to 12b-1 fees, which are often embedded in the investment fees. These fees are meant to pay for the marketing of mutual funds and to compensate the salespeople who bring new investors in.

Wait, salespeople? As implied by the name, potentially thousands of investors pool their money into a mutual fund, which is then invested accordingly by a fund manager. It’s believed that more money invested into a mutual fund would lower operational expenses per investor due to economies of scale. Sales and marketing teams are tasked with bringing more investors into the mutual fund and are compensated via the 12b-1 fees paid for by the plan.


Expense Ratios

A good way to know if you’re overpaying for your 401(k) is to look at your plan investments’ total expense ratio. “Expense ratio” refers to the expenses that will be deducted from investments relative to the total assets. The total expense ratio may include different types of fees, including fund management and administrative fees. To calculate your total expense ratio, simply multiply the weighted expense ratio of each investment plus other fees paid from your account, by total account balance.

In other words, if your account has $30,000, a 1 percent expense ratio means that you are paying $300 in fees out of your assets.

So what’s considered a typical expense ratio? That depends on a number of factors, with company size being one of them. Historically, small businesses tended to be subject to higher expense ratios because their accounts were more costly for providers to administer. According to the 401(k) Book of Averages, a company with 2,000 employees can expect to see an average 0.70 percent expense ratio. In comparison, small businesses plans with 50 employees have an average expense ratio of 1.14 percent. At 25 employees, it’s 1.34 percent.

Expense ratios may read like tiny percentages, but they can have a big impact on your retirement savings over time. Guideline’s average expense ratio for our managed portfolios is only 0.06 percent, so let’s use that as a comparison against the industry average of 1.14 percent. The below model compares the retirement balance of an individual who put aside $5,750 per year over their 40-year career.

The graph above is hypothetical and does not represent actual performance results of Guideline’s portfolios. It is provided for illustrative purposes only and is not intended to constitute investment advice nor an assurance or guarantee of future performance. Investing involves risk of substantial loss as investments may lose value. The returns presented in the graph above are based on the historical performance of the S&P 500 index, and represent returns for time periods that preceded Guideline’s existence. As such, they may not reflect the impact that material economic and market factors might have had on Guideline’s decision-making if Guideline was managing portfolios during such time periods. The returns presented represent the hypothetical returns achieved by two funds achieving the same underlying performance, net of management fees of 1.14% and 0.06%. $5,750 in annual contributions represents the average annual contributions made by participants in Guideline’s employer-sponsored 401(k) plans. A 40 year career is the length of a career that begins after college and ends with social security eligibility. 7.6% annual returns are based on the historical performance of the S&P 500 and its predecessor indices from December 31, 1928 to December 29, 2017. 1.14% represents the average assets under management (AUM) fees of 401(k) plans with $1 million to $10 million in AUM based on a 2018 Brightscope/ICI study of 401(k) plans. 0.06% represents the blended average AUM fees for the funds in Guideline’s managed portfolios.

After forty years, lower fees could make it possible for this individual to save an additional $356,162. While the difference between the higher and lower fees wasn’t obvious early on, the difference compounded as the account’s holdings grew. That’s why understanding the expense ratio of your investment elections is so important, and why so many Americans are likely missing out when they report not understanding their fees.

There’s another layer of complexity for individuals to consider. As employees move from employer to employer, they may accumulate multiple retirement accounts. Each of these comes with its own set of fees and expense ratios. Depending on what each accounts’ fees are, it might be worthwhile to consolidate funds into the one with a lower expense ratio.* Otherwise, you might incur higher fees for retirement accounts that you aren’t even actively contributing to.

We’ve all heard the saying, “No good deed goes unpunished.” Saving for retirement already requires employees to put money aside—the last thing they want to hear is that they’re being penalized for doing so. Unfortunately, small businesses haven’t always had access to plans with the low expense ratios enjoyed by enterprise companies.

Guideline takes a different approach. We don’t charge asset-based fees for our mutual fund offerings. Our modern 401(k) starts at $8 per employee per month, plus a $39 monthly base fee.

Investing in your employees’ retirement is the right thing to do. We believe it should be easy and affordable to do just that.


*We recommend consulting a tax or financial advisor to help determine whether it’s appropriate to consolidate your accounts.

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