In a 2015 study of 4,368 retirement plan participants, the National Association of Retirement Plan Participants (NARPP) found that 89% could not correctly calculate their account fees. Even more disturbing, only 42% knew they were paying fees at all. Most plan participants – 58% - were unaware that fees were being “automatically” deducted from their account.

Given these statistics, there is a good chance you are unclear regarding the fees paid from your 401(k) account. This is a problem because 401(k) fees reduce your account returns – forcing you to work longer to afford a comfortable retirement. However, all is not lost. It’s possible for you to total these fees – even the undisclosed ones – using your plan’s annual fee notice.

The annual 401(k) fee disclosure notice

Each year, the Department of Labor (DOL) requires your 401(k) plan to provide you with an annual fee notice. This notice consists of two parts:

  • An explanation of the plan-level and individual-level fees that might be deducted from your account and
  • A comparative chart that lists each plan investment fund – including past performance information, expense ratio, shareholder fees, and trade restrictions (if applicable).

401(k) provider fees are disclosed in the annual fee notice differently, based on their type - direct or indirect. Direct fees, which are deducted from participant account balances, must be disclosed in the annual fee notice. Due to their transparency, these fees are the easiest to find.

Indirect fees, which are deducted from fund returns, are a different story. They are not disclosed in the annual fee notice. Instead, they are lumped into the fund expense ratios listed in the comparative chart. Examples of these fees include revenue sharing paid by mutual funds and/or variable annuity “wrap” fees paid by insurance company variable annuities.

401(k) fee confusion can have severe consequences

It’s imperative you understand both the direct and indirect fees applicable to your 401(k) account – since both reduce retirement savings. When you don’t, the consequences can be severe. It’s not uncommon for 401(k) providers to charge 1% or more of a participant’s account balance annually in indirect fees. That may not seem like a lot until you consider a 1% drop in returns can reduce your 401(k) account balance by 28 percent after 35 years!

Uncovering indirect 401k fees

Even though indirect fees are not disclosed in annual fee notices, it’s still possible – though not particularly easy - to uncover their amount by using the comparative chart as a starting point. To do so, you’d take the following steps for each fund in your account with a balance:

  1. Locate of copy of the fund’s prospectus
  2. Reconcile the expense ratio reported in the prospectus and comparative chart. Please note the following:
    1. Mutual fund companies often offer a fund in multiple share classes – each with different fees. You need to determine the correct share class (when applicable) for your fund before you look for indirect fees.
    2. If your 401(k) provider is an insurance company, there is a very good chance each fund expense ratio listed in the comparative chart includes a wrap fee. You’ll need to figure what portion of the expense ratio listed in the comparative chart is attributable to the wrap fee.
  3. Once you’ve reconciled the expense ratio, look for 12b-1 fees – a type of revenue sharing – in the fund prospectus. When applicable, they’ll be reported in a breakdown of the fund’s expense ratio

If you found indirect fees, you can total all the fees deducted from your 401(k) account using this spreadsheet.

Why not just ask your employer to hire a 401(k) provider with direct fees?

The NARPP study makes it clear 401(k) participants are confused about their 401(k) fees – even 3 years after the DOL required 401(k) plans to distribute an annual fee notice. I think the #1 source of this confusion is indirect 401(k) provider fees. Because they’re not disclosed in DOL-mandated fee notices, they are easily overlooked.

You need clear fee information to make educated decisions about your 401(k) account. When you don’t get it, you may need to work longer than necessary to afford retirement. If you can’t calculate your 401(k) fees, talk to your employer – they have a fiduciary responsibility to keep your 401(k) fees reasonable so they should be able to help you. If they can’t, you should suggest moving your 401(k) plan to a provider with 100% direct fees. For both your sakes!