Changing Jobs? How to Protect Your 401(k) from Hidden Fees

Key Points

• A monthly fee of $4.55 could cause you to lose nearly $18,000 in account growth.

• A 401(a)(5) fee disclosure form lists all the fees you're responsible for paying.

• A fund prospectus is a good place to go for seeking out less expensive investments.

• The $23,760 Social Security bonus most retirees completely overlook ›

A U.S. Government Accountability Office study reported that 41% of American workers are unaware that 401(k) plans carry fees. Yet these fees can cost a workers thousands (and thousands) of dollars throughout their working years, leaving them with smaller retirement accounts than expected.

It's common to lose track of fees when deciding whether to roll your existing 401(k) over or leave it where it is. However, it's essential to know how much you're paying in 401(k) fees and the effect they'll have on your retirement account.

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Here's what you need to know about 401(k) fees when changing jobs, where to find them, and how to control them. If you're not changing jobs, these tips can help you take control of an existing 401(k) and the amount you're paying out in fees.

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Small fees add up

If you're changing jobs, it's possible that your old employer paid your retirement account fees on your behalf while you worked there. However, once you move on from the job, it's unlikely that the company will continue to cover those fees. If that's the case, your old retirement account may be exposed to fees you know nothing about.

Let's say one of the fees you're suddenly responsible for paying is a $4.55 monthly non-employee account maintenance fee. You could lose $17,905 in fees throughout your career.

Get a copy of your fee schedule

Whether it's an old account managed by a former employer or an account you're opening with your new employer, you need to know exactly where to find fee information. A fee schedule is typically buried deep in the 401(k) plan document, making it difficult to find. Knowing what to look for is the key.

Your employer must provide documents detailing how much you're paying in fees. The fee-specific document is often called the 401(a)(5) fee disclosure, although it may have another name. If you don't have a copy somewhere at home, you can typically find it on your plan's website or through your company's human resources department.

What to look for

401(k) plans label their fees with a variety of names. Here are some of the most common names:

• Transaction fees
• Investment management fees
• Mutual fund expense ratios
• Administration fees
• Individual service fees
• Sub transfer agent fees
• Distribution costs
• Advisor fees

As you review the Participant Fee Disclosure, note any terms that suggest a fee.

How to know if you're paying too much

All 401(k) plans charge fees, and you can't avoid paying them. However, there are steps you can take to keep your costs to a minimum.

401(k) fees usually range from 0.5% to 2% or more of plan assets annually. If the fees associated with your retirement account are more than 0.5%, you're probably paying too much. The chunk of money going to fees each year represents money you could have kept in your retirement account and allowed to grow.

What you can do to control fees

While you won't find a prospectus that covers your 401(k) as a whole, you will find individual prospectuses for each fund in your 401(k). A prospectus is a document that gives you detailed information about each investment, including objectives, expected outcomes, risks, and fees. Most plan administrators provide these documents online. If not, contact your 401(k) administrator or HR department.

You may not be able to eliminate fees entirely, but here's what you can do to reduce them:

• Switch to lower-cost investment options: Review each prospectus for fees. If an investment has a fee above 0.5%, consider whether it's worth keeping in your portfolio. If not, find a less expensive investment to replace it.
• Home in on less expensive options: Consider low-cost funds like index or target-date funds, as they tend to have lower overall fees than actively managed funds.
• Access an online tool: If you're on the fence about whether you're paying too much, take advantage of an online tool like the one offered by the Investment Company Institute. This tool searches for similar plans and compares your fees to those you would pay through another provider. The results give you a good idea of whether you're paying too much.
• Ask for help: Speak with human resources or your plan administrator to learn if there are lower-cost options available that you may be missing.
• Hold steady when possible: Avoid frequent fund changes that can lead to new account fees or penalties being assessed to your account.
• Consider an IRA: If you've left your 401(k) with a previous employer, consider rolling it over to an IRA. IRAs often provide more options for low-cost funds, allowing you to better control high provider fees.

401(k) fees may not actually be "hidden," but they can definitely be a challenge to find. Knowing how to find them could be your superpower, your way of redirecting money once spent on fees toward investments.

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