Understanding the Impact of Plan Fees on Retirement Savings

Graham Mull, CFP®, MBA

When it comes to managing a retirement plan, transparency and diligence in understanding the associated costs are paramount. Plan sponsors play a crucial role in this realm, ensuring that their employees' retirement savings are not unduly eroded by fees. Here, we'll dive into the types of plan fees, their impact on retirement savings, and strategies to minimize costs without sacrificing the quality of your 401(k) plan.

The Different Typesof Plan Fees


Plan fees come in various forms, each impacting your plan and participants differently. Broadly, they can be categorized into three main types:


1.      Administrative Fees: These cover the day-to-day operations of the plan, including recordkeeping, legal, accounting, and trustee services. Administrative fees can be charged per plan, per participant, or as a percentage of plan assets.


2.      Investment Fees: Constituting the largest portion of 401(k) costs, investment fees are paid for managing the plan's investments. These fees are often a percentage of the assets invested in each fund and vary widely among different funds.


3.      Individual Service Fees: These are charged directly to participants for optional features they may choose, such as loans from their 401(k) or investment advice.


Understanding these fees is the first step in managing their impact on your employees' retirement savings.


The Compound Impact of Fees


The effects of fees on retirement savings are not always immediately apparent, but over time, they can significantly erode the value of an individual's retirement savings. Even a 1% difference in fees can result in a substantial reduction in retirement savings over an employee's career. This is due to the compound nature of investing, where small differences in costs can lead to large disparities in end balances due to the foregone compounding on the money spent on higher fees.


Minimizing Plan Fees


Asa plan sponsor, you have the fiduciary responsibility to ensure that your plan's fees are reasonable for the services provided. At Foundation Wealth& Tax Advisors, we act as a fiduciary advisor; helping to reduce your fiduciary liability as a plan sponsor by taking on the following items for you:


·        Conduct Regular Fee Reviews: Regularly review your plan's fees and services to ensure they remain competitive and reasonable. Benchmarking your plan's fees against similar plans to provide insight into where costs may be cut without compromising service quality.


·        Negotiate for Lower Fees: Use your plan's size as leverage to negotiate lower fees with service providers. As your plan grows, periodically renegotiate fees to reflect the increased asset size.


·        Consider Passive Investment Options: Index funds and other passive investment options typically have lower fees than actively managed funds. Offering a mix can provide participants with cost-effective investment choices.


·        Streamline Plan Offerings: Too many investment options can confuse participants and increase costs. Streamlining your plan's investment menu can reduce fees and make it easier for employees to make informed investment decisions.


·        Educate Your Participants: Help participants understand how fees impact their retirement savings. Educating them on selecting lower-cost investment options within the plan can also help mitigate the overall impact of fees.





Understanding and managing the fees associated with your 401(k) plan is crucial in safeguarding your employees' retirement savings. By being proactive and vigilant, you can help ensure that your plan remains cost-effective and serves the best interests of your participants. At Foundation Wealth & Tax Advisors, we're committed to providing the tools and support needed to manage your retirement plan effectively, ensuring a brighter financial future for your employees.


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