When Your 401k Reaches This Number, Fees Could Start Adding Up Big Time

There’s no denying that 401(k) plans are great tools for saving for retirement. They allow you to contribute pre-tax funds each month — money you’re unlikely to miss — but can grow significantly over time. As an added perk, many employers also offer matching contributions, which can help boost your savings even further. However, like all good things, 401(k)s have a cost — or in this case a fee, which can be as high as 2%. While that may seem minimal at first, once your 401(k) savings reach $50,000, and you’re paying $1,000 a year in fees, it can really start to sting.

The fees charged by 401(k)s depend on various factors, including the provider of the plan and the number of employers who participate in it.  Fees can range from as low as 0.5% to as high as 2%. Larger plans, on average, charge around 0.85% in fees while smaller plans average 1.09%. These fees cover the administrator’s costs necessary to run the plan, as well as the expenses of the investments within the plan. In some cases, there may be additional service fees involved if, for example, you need to withdraw money early from your 401(k). While paying fees is inevitable, the real problem is that many people underestimate just how much these fees can impact their overall account balances. Even worse, some don’t even know they’re being charged at all. A 2024 study by the U.S. Government Accountability Office, on the understanding of 401(k) fees, found that 40% of people did not fully understand the fee information for their plan, and 41% didn’t even know they paid fees.

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Over time, 401(k) fees can have a significant impact on your overall returns.  A report from the U.S. Department of Labor and the Employee Benefits Security Administration warns that the cumulative effect of fees, as well as other expenses, can have significant effects on your retirement savings. The report also provides an example of an employee with a $25,000 account balance and 35 years left until retirement. Assuming the account returns an average of 7% during that time, an account with a 0.5% fee will grow to $227,000 at retirement versus $163,000 for an account with a 1.5% fee — a 28% reduction in the overall account balance.

So what should you do if your 401(k) balance has reached $50,000 and you want to take steps to lower your fees? Start by looking at the investments in your plan and their specific expense ratio — also known as the annual fee they charge. Index funds and exchange-traded funds, for example, tend to charge lower fees than actively managed mutual funds. If there is a similar, lower-cost alternative that’s available to you, you may want to consider making a switch. (Of course, it’s important to consider your 401(k) rate of return to see if it makes sense.) Also, if you have any 401(k) accounts from previous jobs, you may consider rolling those into other investment accounts that charge less, such as an IRA. Typically, IRAs offer lower costs — particularly if you opt to use Robo Advisors instead of a person.