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When it comes to retirement savings, most people focus on how much they contribute and how their investments perform. Those factors matter, but there’s another piece of the puzzle that can quietly eat away at your nest egg: 401(k) fees.
Even a seemingly small 401(k) fee—half a percent here, a full percent there—can snowball into a six-figure hit to your retirement. That’s not a rounding error. That’s years of income lost to providers instead of funding your future.
This blog will show you exactly why fees are so dangerous, how to estimate your future losses in retirement, and most importantly, how to fight back and keep your retirement savings intact.
What Are 401(k) Fees?
Every 401(k) plan comes with costs. They generally fall into two categories:
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- Administrative fees – The cost of running the plan, including asset custody, participant recordkeeping, ERISA compliance (e.g., nondiscrimination testing), investment management, and customer service.
- Investment expenses – The expense ratios of mutual funds or other investment options offered in the plan.
These services matter—but the problem comes when you’re charged more than necessary. Over time, those costs grow along with your savings, quietly siphoning away the wealth you worked so hard to build.
The Cumulative Effect of Fees
One of the most important concepts to understand about 401(k) fees is their cumulative effect. A single year of fees may seem small, but 401(k) investing isn’t about a single year—it’s about decades. When fees are deducted every year, they chip away at your balance. Over time, this creates a snowball effect:
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- You lose the fee amount itself.
- You lose the growth those dollars could have earned if left invested.
- Those missed gains compound year after year, multiplying your losses.
The Department of Labor (DOL) takes this so seriously that all 401(k) participants must be warned about it in their annual fee disclosure notices. The mandated language states:
“The cumulative effect of fees and expenses can substantially reduce the growth of your retirement savings. Visit the Department of Labor's Web site for an example showing the long-term effect of fees and expenses at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/a-look-at-401k-plan-fees.pdf. Fees and expenses are only one of many factors to consider when you decide to invest in an option. You may also want to think about whether an investment in a particular option, along with your other investments, will help you achieve your financial goals.”
In other words, the government requires your plan to warn you that fees can substantially reduce your savings—and provide you with an example.
The takeaway is simple: fees aren’t a side issue. They’re one of the most important determinants of whether you’ll reach your retirement goals.
Cumulative Effect Example
To demonstrate the cumulative effect of 401(k) fees, let’s calculate the future savings of a 50-year-old based on the following assumptions:
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- Starting balance: $500,000
- Annual contribution: $15,000
- Investment return: 7% per year before fees
- Time horizon: 15 years
Now, compare the impact of different fee levels at age 65:
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- No annual fee: about 1.83 million
- 0.25% annual fee: about $1.77 million
- 0.50% annual fee: about $1.71 million
- 1.00% annual fee: about $1.6 million
In this example, a 1% annual fee would cost the 50 year-old about $230,000 after 15 years. That’s money that could be funding their retirement—not enriching a provider.
Calculate Your Own Losses
To estimate how much the cumulative effect of 401(k) fees will cost you in retirement, check out our 401(k) Fee Future Value Calculator. Enter your own contributions, timeline, and fee levels, and you’ll see just how high the stakes really are to keep your fees as low as possible.
The Hidden Nature of Some 401(k) Fees
One of the most frustrating realities about 401(k) fees is that they’re not always obvious. 401(k) providers often tuck them into investment costs or bury them in fine print.
A few red flags to watch for:
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- Asset-based administrative fees – Charged as a percentage of plan assets, these fees grow as your account grows—even when the cost of service doesn’t. Asset-based fees are not always bad, but their amount is much more likely to become excessive than flat-dollar fees.
- High-cost mutual funds – Many plans default to actively managed funds with expense ratios well above 1%, even though low-cost index funds are widely available for under 0.10%. Paying more for high-cost funds is worth it if they deliver higher returns, net of fees—but studies show most don’t over time.
- Revenue sharing – Some mutual fund share classes rebate a portion of their investment expenses to 401(k) service providers, such as recordkeepers and financial advisors, to offset plan costs. This revenue sharing can create conflicts of interest that keep fund costs higher than necessary.
- Variable annuities - A variable annuity is a retirement investment product offered by insurance companies. They allow individuals to invest in "sub-accounts" tied to the performance of an underlying investment – usually a mutual fund. Their “wrap” fee can convert a low-cost mutual fund into a high-cost variable annuity.
If you don’t know exactly how much you’re paying, chances are it’s more than you think.
How Employers Can Lower 401(k) Fees
For business owners, keeping 401(k) fees in check isn’t just about employee outcomes—it’s a legal responsibility. Employers who sponsor 401(k) plans are fiduciaries, meaning they must ensure fees borne by plan participants are “reasonable.”
That doesn’t mean free, but it does mean plan costs must be justified. Unfortunately, many small businesses are sold overpriced plans designed to pad provider profits. The result? Participants lose wealth, while employers risk liability.
Employers have lots of discretion about how they keep 401(k) fees in check, but there are steps they can take to make the job easy, including:
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- Choosing flat-dollar administrative fees over asset-based ones.
- Offering low-cost index funds instead of high-cost active funds.
- Eliminating revenue sharing to avoid conflicts of interest.
- Avoiding variable annuities to eliminate wrap fees.
- Paying administration fees from a corporate account, not plan assets, to prevent fees from draining participant balances.
How Employees Can Lower 401(k) Fees
Employees don’t choose their employer’s plan design, but they’re not powerless. Here’s how you can protect your account from excessive fees:
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- Read annual fee disclosure notices. They show exactly what you’re paying and include the DOL’s mandated warning about the long-term impact of fees.
- Select low-cost investment options. If your plan offers index funds, choose them over high-cost actively managed funds.
- Run your numbers. Use our 401(k) Fee Future Value Calculator to see how fees affect your savings.
- Ask questions. If fees seem unreasonably high, raise the issue with HR.
Remember: every dollar lost to fees today is a dollar that won’t compound for decades. If your plan’s options seem unreasonably expensive, speaking up isn’t just your right—it’s protecting your retirement.
The Bottom Line
When it comes to retirement, there are plenty of things you can’t control—the stock market, inflation, or future tax policy. But you can control how much you pay in 401(k) fees.
For employers, that means choosing a plan with transparent, reasonable costs. For employees, that means being vigilant about your investment choices and knowing what you’re paying.
At Employee Fiduciary, we believe small businesses and their employees shouldn’t have to sacrifice their future to hidden or excessive fees. That’s why we offer flat, transparent pricing and access to low-cost index funds—so more of your money stays invested where it belongs.
Ready to see what high fees are costing you? Try our 401(k) Fee Future Value Calculator today. The numbers may shock you—and motivate you to act.
Your retirement depends on it.
