Did you hear the story about the Yale law professor who wrote to 6,000 plan sponsors nationwide, alleging that their 401(k) fees are potentially too high and suggesting that they may be in breach of their fiduciary duties?
It's a true story. The professor's communications have roiled the retirement industry, and his threat to publicize his findings next spring is still reverberating among employers offering these workplace plans.
Figuring out 401(k) fees is challenging to plan sponsors -- the employers offering these plans -- as well as workers, even with fee disclosure rules in place. The structure and price of retirement plans vary widely, as do the services provided.
Though participants are basically at the mercy of the employer when it comes to plan expenses and the investments offered, they can control the cost of their own investments to a certain degree. That's key because the bulk of costs to employees comes in the form of investment expenses.
Minimizing the cost of investing could enrich a retirement account to a greater extent than any surplus in return that a skilled mutual fund manager could deliver over the benchmark. Returns are always uncertain while fees are a sure bet. A smart investment plan will take both into account.
Here are three little-known facts about 401(k) fees that participants should know before deciding where to invest their hard-earned money.
1. Your plan's size dictates cost
People who work for very large companies are most likely to pay comparatively little for their retirement plans. Employees of small companies are likely to pay a lot more.
That's because small plans cost a lot more to run. The difference in fees paid by participants in small plans versus large plans can be more than half of a percentage point, as shown in the table below.
Average fees per asset level
|$800 million-$1 billion||0.44%||0.42%||0.42%|
|$600 million-$800 million||0.45%||0.49%||0.44%|
|$400 million-$600 million||0.50%||0.49%||0.47%|
|$200 million-$400 million||0.53%||0.50%||0.50%|
|$50 million-$200 million||0.66%||0.64%||0.63%|
|< $50 million||0.97%||0.93%||0.94%|
Across all plan sizes, fees have trended downward over the past few years.