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I have a naive question. 401(k) fees are a popular topic lately. I am very interested in this as I max out my 401(k) contribution every year, well past the employer match.

I am not sure if the 401(k) fees people refer to are the expense ratios of the mutual funds in the 401(k), or some kind of administrative fees? If the latter, where can I find out what these are?

I have never seen fees directly deducted from my 401(k) in the transaction history.

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This article has a nice breakdown of the fees people usually face when investing in their 401(k). Not all plans charge all of these fees, but I'll try to summarize the ones they list that occur in general.

  1. expense ratios - this measures the fund's annual total operating expenses and includes some administrative fees, like 12b-1 fees, operating costs, etc.
  2. Other mutual fund fees - these can include brokerage commissions for trades made within the fund, spreads, account fees paid by the institution, etc.
  3. Plan-level fees - These are fees for investment advice (usually charged to the whole institution), general management fees paid to the company that runs your 401(k), etc.

In general, when people talk about "administrative fees," they may be referring to the expense ratio, but there are quite a few administrative fees that aren't included in that. When these fees are deducted from a fund, they won't show up in your account; they'll simply be deducted from the fund's assets each fiscal year and show up in the pricing. For mutual funds, the fees are reflected annual in the calculation of the fund's Net Asset Value.

  • Very helpful! Just to clarify, which of the 3 fees are only reflected in funds' NAVs? I know expense ratios are, but what about other mutual fund fees (I'm guessing not), and plan-level fees (this is the one I'm really not sure about)? – Craig W Jun 7 '13 at 19:01
  • +1 nice breakdown. The first is usually the biggest one, and I preach that anything north of .5% should be looked at carefully, especially when depositing past the match. – JTP - Apologise to Monica Jun 7 '13 at 20:12
  • @JoeTaxpayer Is it worth it to point out that depending on the employer match, it's still better to invest in a 401(k) than another option (assuming you max out your IRA contributions too) because the employer match is essentially free money? I'm fortunate that my employer has enough weight to make point 3 nonexistent, so I don't know how those fees are actually applied in practice. – John Bensin Jun 7 '13 at 20:34
  • @JohnBensin - Absolutely. A dollar for dollar match should never be left on the table. It's after that, the fees may mean just stop, no deposit above that level. – JTP - Apologise to Monica Jun 7 '13 at 21:05
  • @JoeTaxpayer Good to know (that was my intuition, but it's always good to make sure). I know some employers contribute some percentage regardless of what you contribute, in addition to a 1:1 match, which I like to view as "covering the fees." – John Bensin Jun 7 '13 at 21:08
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Both the expense ratio of the mutual funds and the administrative fees charged by your 401k plan administrator are a drain on your investment. However, the expense ratio is not visible in the transactions reported by the 401k administrator (or for that matter on the mutual fund's site either (for non-401k sites)). The share price of a mutual fund is net of the expense ratio. So, you never see this drain as a visible expense on your statement from the mutual fund or 401k administrator. However, you should be concerned with these fees because many 401k plans offer mutual funds with high expense ratios, and even with index funds, many 401k plans offer index funds whose expense ratios are considerably higher than industry leaders such as V.... and S.... (names deleted)

Administrative fees, on the other hand, are amounts explicitly deducted from your 401k account. If you don't see these explicitly, you

  • might be in your first year of employment and the (commonly annual) administrative fee deduction has not occurred as yet.

  • might have a generous employer who has set up a plan with the proviso that all the administrative costs will be paid by the employer and the participants will not be charged any fees

  • might have a large employer (or very small employer) whose HR department (or spouse) runs the 401k plan in-house instead of farming out the job to companies that offer 401k plan administration

  • might have a 401k plan where a fee is charged at the time of the purchase of shares in the mutual fund. You contributed $500 this month, say. Did you check if the purchase price of the shares as shown on the 401k plan statement matches the purchase price of the shares as listed on the fund's own web site?

  • might have a 401k plan that is deducting an amount from the dividends and capital gains being paid out by the mutual fund. Do the numbers reported on your 401k statement match the numbers reported by the mutual fund itself? For example, if mutual fund XNIIFV reported a dividend of 10 cents per share (you can get this information from the mutual fund web site), does this match what the 401k plan statement shows?

  • I think it must be that I have a large, generous employer so I don't get charged administrative fees. I see no fees over more than 2 years now, and the shares purchased are exactly how many it should be given the contribution amount and NAV on that date. The only thing I can't confirm is that it's not being taken out of dividends and capital gains (because it's hard to tell how many shares I had when these were paid), but this seems unlikely anyway. – Craig W Jun 7 '13 at 20:09
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    @CraigW In my experience administrative fees are relatively uncommon. Typically the fees are in higher than average expense ratios. – stoj Jun 8 '13 at 5:17
  • @stoj The expense ratio fees are monies that the mutual funds collect. The 401k plan administrator has to do lots of paperwork, maintain a plan website where participants can admire their balances, field questions, etc. Unless the 401k plan is run in-house by the employer or is run by a mutual fund group or brokerage which waives fees in hopes of attracting investments into its funds, there is money changing hands. The employer pays money to the 401k administrator to run the 401k program, and the administrator might charge fees to participants too. My experience is 50-50. – Dilip Sarwate Jun 8 '13 at 10:46

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