When it comes to your 401(k), you probably don’t think about fees. After all, your employer foots the bill, right?

Wrong. Employees typically paid mutual-fund expenses, but now more are shouldering administrative expenses, which employers used to pay.  Some of these fees are hard to detect unless you read the fine, fine print about what’s going on with your investments. Over time, those fees will actually cut into your retirement savings potential.

How high are these fees? It varies.  Ted Benna, who created the first 401(k) plan in 1981 and is founder of the 401(k) Association, a Pennsylvania benefits consulting firm, said “Fees for 401(k) plans run anywhere from 10 basis points (0.10 percent) for IBM’s plan to 300 basis points (3 percent.)”

Typically, 401(k) annual fees run from .25% to 1.5%. However Bloomberg did a study that showed the fees averaging much higher.  You can watch their review on YouTube.

Watch these videos on YouTube

Part 1
http://www.youtube.com/watch?v=08UPQ3JaRek

 Part 2
http://www.youtube.com/watch?v=94eDjL4ciVE

The fees are subtracted right out of the savings in your account, and there is no requirement to notify you about them: when you get your quarterly 401(k) statement in the mail, you will find no line-item expense labeled “fees.” The bulk of these fees are for investment services. Most people who invest in 401(k)s invest in the major mutual funds and have to pay these investment fees by law. (In response, some corporations have created their own generic wholesale funds to give employees lower-cost options.) Some plans also charge fees for legal, administrative, record-keeping and even advertising costs.

The cost to you. Depending on their size, fees can determine whether your nest egg looks like an ostrich’s or a sparrow’s. Here are two examples. 

First example:  Over a 20- or 30-year period, these fees can really affect the compounding of your assets. The Department of Labor offers an example: if you have $25,000 right now in your 401(k) and just let it sit there, and your investment returns average 7% across the next 35 years with 0.5% annual fees, you will end up with $227,000 in 2042. But if those annual fees are set at 1.5%, you will end up with only $163,000 in 2042. A 1% difference in fees and expenses would leave you with 28% less money for retirement. Wow. Please note that the 7% return used in this example is for illustrative purposes only and is not indicative of any particular investment; your results will vary.

Second example: Say you invest $50,000 in a plan that charges a 0.5% fee, and you enjoy an 8% annual return for 30 years. You will retire with $437,748. Pay fees of 1.5% and you will have $107,000 less.  (Rate of return is for illustrative purposes only)

The fees are not always visible. Typically, a broker will set up a company’s plan at no charge, bundling fees for administering the account with mutual fund expenses. The broker stuffs the plan with higher-cost share classes, which drain money from employee’s accounts. “In essence, the company shifts the costs of administering the plan directly to the employees,” explained Don Phillips, Managing Director of Morningstar, the Chicago-based mutual-fund research company.

Things may change. In 2007, the Government Accountability Office issued a report commissioned by Congress that revealed that about 80% of 401(k) plan participants didn’t know how many fees they were paying, or how much in fees they were paying. Federal legislators have recently pushed to change the rules on 401(k)s and make the companies that manage them provide clearer and plainer information on fees. In fact, the GAO report urged Congress to require the disclosure of 401(k) fees to permit investors to compare plan options. That would essentially permit you and your co-workers to shop for a 401(k) program as never before.

Hopefully this helps you learn more about the fees in your 401(k).  If you have an old 401(k) or IRA you don’t know what to do with give us a call.  We can most likely lower your total fees.