401k Fees Decoded
At the end of every month, I sit down and catalogue my spending in an excel spreadsheet. I find it oddly calming (yeah okay, I’m a nerd). While I don’t have a strict budget in the traditional sense, I’ve found that tracking my spending helps me to see where I may be overdoing it. (This past month the gingersnap lattes put me over budget. So, no surprises there.)
I realized something in my latest catalogue though: there are certain expenses I have every month that actually never make it to my spreadsheet. Namely, the fees I pay associated with my 401k account, since they are taken out of the account itself rather than my checking or credit accounts. Without including these fees, I realized I wasn’t really seeing the full picture of my spending. I decided to start the year off by making sure I am accounting for those expenses along with everything else.
As I started to look into it, I found that these fees fall into three main categories: administrative/record keeping fees, internal fund expenses, and management fees.
Administrative/Record Keeping Fees
The first category is the one that unfortunately we all have the least control over when it comes to our 401k accounts. Our employers choose the record keeper that houses our 401k and they set their own administrative fees which they charge automatically. Beyond petitioning your employer to change record keepers, there’s not a lot you can do about this one. Luckily for me, the record keeper that holds my 401k charges a flat fee that’s pretty easy to swallow: $5/month. Other record keepers may charge fees that are a little less straightforward. These fees should be itemized on your account statement or at least available in a fee disclosure within your account or on request. If you don’t know how much you’re paying, call your record keeper and ask!
Internal Fund Expenses
The second category is one we start to have a little more control over (though less than we would in an IRA or traditional brokerage account, due to the limited fund line ups available in employer-sponsored accounts). Each fund you’re invested in within your 401k also charges a fee, typically as a percentage of the amount invested. I’m also lucky in this category that many of the options available to me within my 401k are low cost, so the weighted expense ratio of all the funds in my portfolio is currently about 0.07%. Market fluctuations make it difficult to get an exact dollar amount on this unless your record keeper provides one, but you can estimate using the following formula: [weighted expense ratio (keep in mind that my 0.07% would translate to 0.0007 for this calculation) / 12 months] * total account value at the end of the month. So for December, my internal fund expenses would have cost me about $1.46. Not too bad!
In comparison, let’s assume my weighted expense ratio was 1% higher, at 1.07%. This would have made my cost for December jump to $3.57. That still seems pretty low, but over a full year, that would have been an increase of over $25, and that amount only grows as the account does! Making sure your internal fund expenses are as low as possible can have a huge impact on your account growth over time. This is one area where it’s definitely worth reaching out to your HR department if your current options aren’t up to snuff. If you need help building a case, reach out to us! We’ve got your back.
The last category is the one we finally have full control over. This is the amount we pay for help managing the account. If you’re a blooom client, you already know exactly what you’re paying in this category, because it’s a flat fee that came out of a separate funding source, rather than being buried in the other fees of your 401k account. A blooom client paying annually at a discounted rate of $99 year would pay $8.25/month.
If you’re paying for a traditional management service however, you’re likely in for some math again: these services typically charge by a percentage of the account’s value. So like we saw with internal fund expenses, that expense will only grow over time. Given that, the obvious choice is to go it alone and bring your cost down to $0, right? Well, maybe not.
A study by Financial Engines that looked at defined contribution plan participants from 2006-2012 found that the median return was 3.32% higher for those with professional guidance. According to this study, for a 45-year old, this could translate to 79% more wealth at age 65! This seems to suggest that getting some help with your investments is worth it in the long term, but there’s still no reason to pay more than you should. To save money in this category, look for low cost services that are up front about their fee structure and fit with your goals and risk tolerance.
The Full Picture
So looking at all of these fees together, I paid $14.71 towards servicing my 401k in December. But since the blooom subscription was already accounted for, it’s actually just the additional $6.46 that I’ll need to add to my spreadsheet this time around. One study estimates that a typical worker — earning the median income and paying the average 401(k) fees over their lifetime — will be assessed a total of $138,336 in fees. And it’s estimated to be worse for high-income workers, thanks to the fee structure of the average 401(k) plan.The fees you uncovered in your own account might be higher or lower, but hopefully just the act of looking them up was empowering and eye-opening. In this case, ignorance is definitely not bliss! After all, it’s only once you know how much you’re paying that you can take steps to lower it.
We leave you with this 401k fee advice:
May you have the strength to accept the things you cannot change (Administrative/Record Keeping Fees), the courage to change the things you can (Internal Fund Expenses/Management Fees), and the wisdom to know the difference (blooom’s here to help).
Published on February 26, 2019