This Key Form Could Help You Have ‘Thousands of Extra Dollars Saved for Retirement’

It takes money to make money, as they say, and 401(k) retirement plans are an example of this. In addition to the contributions to the plan, you also must pay the provider maintenance and management fees. However, the federal government mandates that plan providers also must release 404(a)(5) Participant Fee Disclosures annually or any time there are significant changes. Account holders can use these disclosures to compare the true cost of fund options.

Investing in a 401(k) Plan

A 401(k) is a retirement savings plan sponsored by a worker’s employer. Employees can designate a portion of their incomes as ongoing contributions to their plans to be made each time they’re paid. These contributions aren’t taxed in the year they’re made unless the 401(k) is a Roth plan. The money is taxed when it’s withdrawn in retirement, however. 

401(k) Fees: What and How Much Are They?

401(k) plans are unfortunately riddled with ongoing fees imposed by plan providers. Most of them fall into three categories:

• Investment fees

• Administration fees 

• Individual service fees

Investment Fees

These may well be the most significant fees imposed by a plan. They’re not unique to 401(k)s but are universal through numerous types of investments. They can include expense ratios, the costs of marketing, and sales loads that are charged for trading shares. These fees are generally charged as a percentage of your investment and are deducted from your returns.

Investment fees typically range from 0.2% to 1% of the total balance to cover management and investment expenses, according to Trevor Houston, CEO at ClearPath Wealth Strategies, LLC.

Administration Fees

401(k) plans incur daily and monthly maintenance expenses just like any business or household. Administration fees typically pay for things like trustee, legal, and accounting services, as well as the costs of customer service representatives and plain old recordkeeping.

Some plans include these fees in their investment fees, but this means they’re effectively hidden, so you may have to do some serious hunting through your plan documents to find out how much they are. Your employer might contribute to these fees. 

Individual Service Fees

These fees are optional to some extent. They’re charged when and if you elect to make use of an extra service offered by your plan, and the cost isn’t passed on to you through another category. This can include taking a loan from your plan, making a hardship withdrawal, or doing a rollover.

Other Fees

The list by no means ends with these three categories. Some fees don’t obligingly fall into a neatly defined category, but this doesn’t mean you won’t have to pay them, and they can add up to have a significant impact over the decades. Even a 0.5% to 1% ongoing fee can translate to shaving six figures off your savings when retirement time comes, depending on the value of your account.

A 12b-1 fee applies only to any mutual funds that are included in your plan. It generally pays for marketing and advertising.

Some plans are actively managed by professional advisors, and these obviously tend to cost more. Passively managed plans rely more on respected market indices.

Fees can also vary by the size of your plan. The smallest plans average 1.26% while billion-dollar plans average just 0.27%.

“Two workers with the same balance could be paying thousands in difference just because of their employer’s plan size,” Houston said.

Disclosure Rules and Form 404(a)(5)

The federal government has addressed how 401(k) fees sometimes are hidden in copious paperwork and forms provided by plan providers.

The U.S. Department of Labor mandates that 404(a)(5) Participant Fee Disclosures must be provided to plan administrators and participating employees at least once a year and within three months of any significant plan changes. The Employee Retirement Income Security Act (ERISA) requires the distribution of these disclosures as well. They must identify all charges made to an employee’s plan. 

Providers must also distribute an additional statement called “Actual Changes or Deductions” each quarter. This cites the exact amount of dollars involved and describes exactly what those dollars pay for.

According to Lisa A. Cummings, Esquire, attorney and executive vice president at Cummings & Cummings Law, plans must provide participants an annual notice of participant-level fee information. This includes a comparative chart for each investment fund option listing the objectives, benchmarks, performance and expense ratios, and plan-level administrative fees. Quarterly account statements must show actual dollar fees deducted from each participant’s accounts.

An Employer’s Responsibilities

The reporting and disclosure burden doesn’t fall entirely on plan providers. In addition to ensuring their employees receive a copy of their 404(a)(5) Participant Fee Disclosures, employers also are charged with monitoring the situation to determine that these fees remain reasonable and consistent.

They can dodge the distribution requirement if they can corroborate that the plan provider has done so, and electronic transmission has been permissible since 2020 if the employee expressly requests this.

“Employers will typically post these annual notices electronically on the 401(k) plan’s portal for participants to review,” Cummings said.

Use Form 404(a)(5) to Your Advantage

So, you’ve received your 404(a)(5) disclosure. Now what? Some websites make it easy for you to determine just how much those disclosed fees are going to deplete your savings by the time you retire. They offer calculators online. The equation is based on the fees, how long you have until your anticipated retirement date, and your contributions to your plan, as well as those made by your employer, if applicable. 

The 404(a)(5) disclosure also includes a comparison tool.

“A 401(k) plan participant can use the 404(a)(5) comparative chart in the annual notice, as well as the quarterly account statement, to calculate an ‘all-in’ cost and choose the lower-cost investment fund options,” Cummings said. 

Houston provides similar advice.

“Review your 404(a)(5), mark your current investments, and compare them side by side,” he said. “If you find high-cost funds, look for some comparable lower-cost index funds in the plan. Small adjustments can result in thousands of extra dollars saved for retirement.”

And nothing says you can’t approach your employer and question fees that seem excessive.

The Bottom Line  

You’re not alone when it comes to saving for retirement and making sure you get the most out of every dollar you contribute to your 401(k) plan. Holding index funds in your plan generally costs less than maintaining actively-managed funds. And understanding the fees you pay will help you make smart decisions about your investment portfolio.

Consider touching base with a financial advisor if your 404(a)(5) raises questions that you or your employer can’t easily answer, or if you can’t find the information you’re looking for in the document.