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Finding Hidden 401(k) Fees in Participant Disclosure Notices

Eric Droblyen

January 26, 2023


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 the importance of 401(k) fees, this confusion is a problem, but not at all surprising given the lack of clear fee information available to 401(k) participants today. The Department of Labor (DOL) finalized participant fee disclosure rules in 2012, but they fell short of full disclosure. Most notably, they allow 401(k) providers to bury some to all of their administration fees in fund expense ratios.

However, all is not lost. If you are a 401(k) participant, you can still uncover all of the fees deducted from your account – even the hidden ones. I’ll show you how.

What are "hidden" 401(k) fees?

401(k) plans are never free. All 401(k) providers charge fees in return for plan services such as asset custody, participant recordkeeping, Third-Party Administration (TPA), and professional investment advice. These 401(k) administration fees can either “direct” or “indirect” in nature: 

  • Direct fees – these fees can be paid from either 1) plan assets or 2) a corporate bank account. They are highly transparent. Their dollar amount must be explicitly reported in invoices in DOL-mandated fee disclosures and participant statements. 
  • Indirect fees – these fees are paid by plan investments. They lack the transparency of direct fees. Their dollar amount can be buried in the fund expense ratios of fee disclosures, and not appear at all in participant statements. The two most common forms are revenue sharing and variable annuity “wrap” fees.

Due to their lack of transparency, indirect administration fees are often called “hidden fees.”  

The annual 401(k) fee disclosure notice

Each year, the DOL requires every 401(k) plan to distribute an annual fee notice to plan participants. This notice consists of two parts:

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

The results of the NARPP study are not surprising when you know this notice is not required to disclose the dollar amount of indirect fees. 

Not knowing your 401(k) fees can have severe consequences

It’s imperative you understand both the direct and indirect fees paid by your 401(k) account – because both will reduce your investment returns dollar-for-dollar.

The consequences can be severe when you don't. 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!

How to uncover hidden 401(k) 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 a 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.

How to avoid hidden 401(k) fees

The NARPP study makes it clear that 401(k) participants are confused about their 401(k) fees – even 3 years after the DOL fee disclosure rules were released. 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.

That said, it's really important for you to understand ALL the fees paid by your 401(k) account – because both direct and indirect fees reduce account returns. If your total fees are unclear due to hidden indirect fees, I have a simple solution – ask your employer to replace your current 401(k) provider with one that only charges fully-transparent direct fees.

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