When you participate in an employer-sponsored 401(k) plan, the plan custodian invests your money in an array of different mutual funds. Retirement plans are subject to a variety of different fees, and these costs form your 401(k) plan's expense ratio. To some extent you can control these fees by carefully making investment decisions, but some 401(k) charges are unavoidable.
Investment firms and brokerage houses operate 401(k) plans on behalf of employers in the United States. Plan custodians produce brochures detailing your investment options, and many companies employ licensed investment representatives who can help you make informed decisions. You receive plan statements at least once per quarter, and you have the opportunity to make adjustments to your investment selections at least once per year. The expense ratio on your 401(k) covers the operating costs of the plan custodian, such as the cost of mailing out statements and the wages of the plan administrators. These fees are deducted directly from your holdings, and all plan participants must pay these fees.
Investment firms operate the mutual funds that you hold within your 401(k), and these firms also impose fees that form part of your expense ratio. Fund managers buy and sell the securities that are held within a mutual fund, and management fees form part of each fund's expense ratio. Mutual fund companies mail quarterly reports and shareholder documents to your 401(k) plan custodian, and the costs associated with producing these documents are passed onto you. Expense ratios vary between mutual fund companies, and you can minimize this portion of your 401(k) expense ratio by investing in low cost funds.
Aside from the basic operating costs associated with your 401(k), some firms offer additional services for an extra cost. These may include advisory service hotlines, online portals for making investment selections and even retirement planning software. The more services you utilize, the more your plan expense ratio is likely to rise. Some firms charge a flat fee for these services while in other instances the fees are charged as a percentage of your overall assets.
A 2011, study by Deloitte found that the average annual expense ratio on a 401(k) account amounted to 0.78 percent. However, the investment account expense ratio only includes fees related to ongoing costs, such as management and administration fees. Sales commissions known as loads are not part of the expense ratio even though you may have to pay these charges whenever you buy or sell shares within your 401(k) account. Sales loads are charged as a percentage of your investment and often top at 5 percent. Likewise, administrative fees associated with retirement plan loans or the rollover of funds are not included in your expense ratio.