401(k) fees: breaking down the cost

Written by Kevin Hagen

401(k) fees depend on the type of plan, the investment options, any special features offered, and the number of participants. Fee structures can vary among different providers. If you choose an all-inclusive "bundled" 401(k) plan, you pay fees to one plan administrator. In an unbundled arrangement, you pay fees to different providers, such as a consultant to design and set up the plan, a trustee, a record keeper and an investment manager.

Some fees are one-time, such as for setup. Other fees are ongoing in the form of an annual fee or a fee per employee. Investment management fees are generally expressed as a percentage of fund assets. As the employer you will bear some of the fees, and others may be charged against the participants' earnings.

Types of 401(k) fees

A one-time fee is charged to the sponsor – your business – for the cost of setting up a new plan and educating and enrolling the employees. There will also be a fee for converting from one provider to another, and for adding or terminating features, such as investment options, online advice, or brokerage services.

Ongoing fees for plan administration include record keeping, custodial or trustee services, investment consulting, and intermittent services such as audits, compliance services, legal counsel, and participant education. Depending on your plan, there could be fees for enhanced services such as online advice, brokerage windows, and communication and education programs.

Fees for investment options, which are normally charged against the participants' accounts, include the expense ratio, which is a fee for managing a mutual fund, and front- and back-end loads, which are commissions charged when buying or selling a share in a fund. There could be a 12b-1 fee for sales commissions and account servicing. A wrap fee could be charged for managing a variable annuity. This could include an insurance benefit feature, front- or back-end loads, and a redemption fee.

Participant fees, which are often charged to the participants but are sometimes paid by the plan sponsor, include redemption fees, brokerage or mutual fund window fees, annual or usage fees for online or one-on-one advice, and fees for buying or selling company stock.

Distribution fees can be incurred when a participant withdraws assets from the plan, service fees on loans taken out by participants, and service fees on qualified domestic relations orders. Retirement plans sold by insurance companies could include a "mortality fee" for a promise to pay the beneficiary at least the amount originally invested.

Fee disclosure

The U.S. Department of Labor has created a disclosure form to break down the different types of 401(k) fees (PDF download). Different providers structure their fees in different ways, but by stating fees in a standardized format you can make a better comparison and make a more informed decision on which plan is best for you in terms of cost.

To get a better understanding of 401(k) fees and how it impacts your employees, submit a free BuyerZone request for Employee Retirement Plans price quotes today.