June 14, 2016

401k's Usually Have High Fees But Most Peoples 401k Does Not

You may have heard that 401k's often have high fees.   They do.   Most 401k plans are charging high fees just for the 401k itself.    Thats bad and erodes peoples retirement savings.    But while most 401k's may have high fees, that doesn't mean that most people have bad 401ks at their jobs.    Let me explain..

When you look at all the 401k's out there you'll be looking at lots of 401ks offered by small businesses.   Small business plans have 401k's with a few employees and relatively low balances.   Those plans tend to have higher fees as a percent of assets.    This is due generally to overhead costs and scale.    Large companies have 401k's with many 100's of employees and millions of dollars of assets.   When the 401k administrator figures the fees it can be a much lower percent of assets due to volume.    Large 401k market is also much more competitive so you get lower prices that way.

Generally small companies have high 401k fees and large companies have low 401k fees.     But since there are far more small companies then there are far more 401k's with high fees.     On the other hand most people work for the larger businesses and then they have 401ks with lower fees.

Combine that all and you get :

The average 401k has high fees.   - AND -  The average persons 401k does not have high fees.

The GAO report  401(K) PLANS Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees (from Apr. 2012) has this chart showing average fees based on plan size :

So while the average 401k had a fee of 1.13% the large plans were only at 0.15%.   Plans with 50-400 people were paying 0.24%.    And the majority of people work at companies with > 100 employees.

Looking at BLS data on employment by firm size  (figures dated 2009) we can see that ~60% of people work at companies of 100 or more.     38% of people are employed by companies over 1000 employees.

Whats more the small 401k's offered at small companies with under 50 people are even worse than the average and they charged 1.33%.

Bottom line :   As far as fees, the 401k's at small businesses are usually bad but big  companies offer decent 401ks.



  1. Is this fees paid by participants on their funds or fees paid by the 401-k owner (the business) to have a financial services firm administer the 401-k. I have a 401-k through a very large employer. I pay very low index fund fees on vanguard index funds, something like 0.07%. I could also choose some actively managed funds that charge 1.00% or higher. But as far as other fees that the 401-k has, I do not pay a single penny. If I put all my money in a CD fund for example I would pay zero fees. Any fees paid to administer the 401-k are paid 100% by the employer. I have had 4 different 401-k's at 4 different employers. 2 extremely large, 1 medium, 1 very small (to be fair the very small one was a SIMPLE IRA account). In every single instance, any fees required to administer the 401-k were paid 100% by the employer. All could potentially have offered the same low cost vanguard index funds although I can't recall if they all did. In this case even if the employer was small and had to pay high fees, none of those fees were paid by me.

    So which fees are we talking about here? Fund fees or administrative fees? If administrative fees, are those typically paid by plan participants, because I have never been charged a dime for administrative fees in any of the 4 company plans I have been in.

    Given most decent plans have some low cost s&p500 type index funds in them I have always been baffled by the claims that 401-k's are an expensive place to have your retirement funds and fees will eat them up and if you ever leave you should immediately roll your funds out of the company plan.

    I have since left my large employer and have a very substantial balance of funds in my account. All of it invested in vanguard index funds at around 0.07% fees. In fact they are investor class retirement based class of the fund shares that I cannot buy in my own IRA with slightly cheaper fees. I have no intention of moving my money out of the 401-k because it is actually the cheapest place I can make those investments.

    So I am wondering if my situation is unique or if the detractors are just complaining about something that is far from true in many plans.

  2. Apex,

    The fees quoted in the article are the administrative fees and 85% of the time the employer pays them.
    Good question, I should have made that clear.

    To your point about people complaining about high fees in 401ks: I like you have a large employer who pays all admin fees and I have funds with very low fund fees. So my fees are low too. Most people work at bigger companies and usually I think thats the case in large companies.

    On the other hand for smaller companies the fees are generally higher (less volume so higher % rates for admin fees). The employers may pay for those admin fees but I believe they often do so by getting a 401k with high fund fees or loads and then getting a rebate (kick back) from the 401k admin. The net result is that the 401k that the employees get has high fund fees. So while the employees don't pay that admin fee directly they end up paying it through high fund fees and loads. And worse there are more small companies that don't cover the admin cost and its paid by the employees and taken out of their 401k fund balances. WHile there are fewer people working at small companies like that, there are a lot of small companies like that. Small companies outnumber large ones. AT least this is my understanding of the situation.


  3. Thanks for that reply. That actually helps explain the situation. So the real issue is if you have poor choices in your 401-k that is probably because the small company is able to get lower admin fees or kick backs to cover some of the admin fees if they only offer high fee or loaded funds.

    I think that must be the situation most people are complaining about. I have just never had such poor 401-k choices so it has been a bit strange to me to see all the negative comments about fees.

    The other comment is often the low number of choices. My thought on that is if they offer me 2-3 good index funds, something like s&p 500, mid-cap or small cap fund, total market fund, international fund. Basically a few of those in a low cost vanguard type index fund, why do I need any more choices? And most people shouldn't have more choices. They wouldn't know what to do with them anyway. They have actually shown that if you give people too many choices in their 401-k most people end up way too heavily loaded in money market / CD type funds because they are too confused to choose the funds so they just default to cash type funds.

    Thanks again.

  4. I'm not sure about the complaints about low number of fund choices. It may be more of a complaint about "poor" choices available. But maybe some people prefer more choices just in general to give them more flexibility. Maybe its more like people saying "I've only got 10 funds to choose from and they all suck".

    Our 401k doesn't have a ton of choices now and that suits me fine. But we've got some good options.



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