How 401(k) fees can cost tens of thousands in retirement savings

Many U.S. workers relying on 401(k) plans for retirement may be unaware of how hidden fees can erode their savings, potentially costing them tens of thousands of dollars. These charges, often overlooked, can have a substantial impact on the final retirement income.

The Department of Labor highlights that even a seemingly small difference of 1% in fees can drastically alter a person's retirement nest egg. For instance, a worker with $25,000 in savings and 35 years until retirement could see their balance drop from $227,000 to $163,000 if fees increase from 0.5% to 1.5% – a 28% reduction.

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There's just not one standard.

Compounding this issue, a 2021 study by the Government Accountability Office found that about four in 10 workers do not even realize they are paying fees on their 401(k)s. These fees are typically categorized into administrative and investment-related costs, which can be borne by the employee, the employer, or shared between them.

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In servicing a plan, there are fixed and variable costs. The fewer employees you have for those fixed costs to be distributed across, [that] can have some implications.

Teresa Hassara, a senior vice president at Principal Financial Group, explains that fees vary based on investment choices, employer plan design, and plan size. Smaller plans often incur higher fees due to the distribution of fixed costs across fewer employees. Typical fees range from 0.3% to 0.5% for large plans, 0.5% to 1% for mid-sized plans, and 1% or more for smaller ones.

While workers cannot set the fees, they can influence their overall cost by selecting lower-cost investment funds. Fees are generally divided into three main categories: investment fees (the largest portion, deducted from returns), administrative fees (covering operational expenses like recordkeeping), and individual service fees (for optional transactions like taking a loan).

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Some investment options have higher underlying investment expenses than others.