Retirement savings like 401(k) plans are a great tool for investing in your future. Utilizing stocks, bonds, mutual funds, participants can create a conservative, aggressive, or moderate investment portfolio.
There are often a variety of fees associated with a 401(k) is employer-sponsored account. These fees pay for a variety of services and management options. Read on to learn about common 401(k) fees and how they may impact your savings.
Types of 401(k) Fees
When it comes to paying 401(k) fees, it’s important to note that some are incurred based on withdrawals, and others are part of the plan itself. Either way, you should understand a plan’s structure, rules, and regulations before investing your nest egg.
- Investment Fees: One of the most common fees is an investment fee. These fees are incurred from a combination of sales charges, management services, and other plan fees for having the account. According to the Balance, this fee can often be found in the plan summary or description under terms like fund’s prospectus or expense ratio. Essentially, the plan has a percentage associated with the funds, like 1%, that participants will owe annually for having the account. The Balance uses this example: for every $10,000 invested, there is a $100 investment fee that will be paid to the plan provider, such as Fidelity, Vanguard, or ADP.
- Individual Service Fees: These fees impact participants who participate in extended plan options, like 401(k) loans. If you find yourself in a tough financial situation, a 401(k) loan allows you to borrow money from your retirement account instead of a getting a traditional loan through a bank or credit union. While it may seem easy to borrow money from yourself, there are often hefty fees associated with the transaction. Not only will you have to pay an origination fee, which varies between plan providers, but if you leave your employer after taking out a 401(k) loan from the employer-sponsored account, you will have additional fees to pay, including early withdrawal fees, income tax, plus the outstanding loan balance. Learn more about 401(k) loans and leaving a job.
- Management Fees: This type of fee is paid by the plan participant to the plan provider, such as Charles Schwab, Fidelity, or Merrill Edge. Regardless if your plan is employer-sponsored, the managers of your account get paid for their time and expertise to oversee funds. Fee structures vary for plan providers, but most charge a percentage on the funds managed. Learn more about management fees through Investopedia.
- Administrative Fees: Most, if not all, plan providers charge administrative fees to pay for account operations. According to the Department of Labor, this can include recordkeeping, accounting services, voicemail systems, retirement planning software, online transaction services, educational seminars, and other related charges. While these fees are likely paid for by the plan sponsor, such as your employer, there are instances where this is paid for by the participant. Ask your HR team or benefits specialist for a plan summary to learn more about the fees associated with your account.
- Withdrawal Fees: When you turn age 59½, the Internal Revenue Service (IRS) allows you to make withdrawals from your retirement accounts without penalty, but if you start withdrawing funds prior to retirement, you will be penalized with taxes and early withdrawal fees, which can add up to 10% in fees alone. Knowing this, it’s important to leave your accounts alone until you’re ready to retire, but in the case that you need to tap into your funds for an emergency, explore hardship loans through your plan provider. While you’ll still have fees to pay, there may be some penalties you’re able to avoid. Learn more about early withdrawal fees through NerdWallet.
While some fees are unavoidable, the best way to avoid additional fees is to understand the structure of your 401(k) plan. Connect with your financial advisor, plan manager, or HR team to learn more about the fees associated with your account.
If you can, also try to avoid early withdrawal fees, even in the case of an emergency. Look to other solutions like personal loans, to help you through a financial emergency.
For more information about retirement savings and solutions, visit the Slavic401k blog.