How You Can Lower Your Retirement Plan Costs

When it comes to building wealth for your retirement, one of the most important factors often gets overlooked—investment fees. Specifically, retirement plan fees can eat into your returns over time, making it harder for your money to grow at the rate you’d like. But the good news is, you have more control over these fees than you might think.

In this blog post, I want to talk about how you can identify what you're paying in fees within your retirement plan, how to lower those fees, and ultimately, how you can help your money grow faster.

What You Need to Know About Retirement Plan Fees

Not all retirement plans are created equal. Some offer relatively low, reasonable fees and a selection of good investment options, while others can have high fees and limited, subpar options. So, how can you figure out what you're paying, and more importantly, how can you potentially lower these costs?

The first step is to download a report called the Participant Fee Disclosure. This document clearly lays out all the fees associated with your retirement plan and explains how much you’re paying for each service.

There are generally three types of fees in most retirement plans, and only one of them is something you can do something about. Let’s break them down:

1. Administrative Fees

Administrative fees cover the costs of maintaining the retirement plan itself. This includes record-keeping, answering employee questions, managing the website, sending out statements, and more. These fees are usually either a fixed amount per employee (sometimes paid for by your employer) or an asset-based charge, meaning they’re a percentage of the assets in your account.

If your plan uses an asset-based charge, this can be more costly as your account balance grows. While you don’t have much control over this fee as an employee, you can still speak with your employer about the possibility of lowering this fee for the entire group of employees.

At my firm, Morrissey Wealth Management, we help companies with their 401(k) plans. Often, I see high administrative fees that could be lowered. By working to reduce these fees, employees can have more money working for them over time.

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2. Individual Service Fees

These are fees that you pay when you use certain services, like taking a 401(k) loan or making a rollover. You might also pay fees for using a brokerage window (a feature that allows you to invest in individual securities like stocks or bonds).

Individual service fees tend to be on the lower end. For example, a 401(k) loan might cost you a couple of hundred dollars, while a rollover could run around $50. While these are relatively small, they are still costs you want to be aware of. However, since these fees are only incurred when you make a transaction, you don’t need to worry about them unless you’re using these services.

3. Investment Fees (The Big One)

This is where you can really make a difference. Investment fees, often in the form of an expense ratio, are the costs associated with the mutual funds or other investment options in your retirement plan. These fees are usually asset-based, which means they are a percentage of your account balance. The higher your account grows, the higher your fees will be—unless you take action.

For example, let’s say your retirement plan investments have an annual fee of 0.5%. If your account balance is $100,000, that’s a $500 annual fee. But if your account grows to $200,000, the fee doubles to $1,000, even though the percentage remains the same.

Investment fees can range from as low as 0.03% to as high as 2%. With such a wide range, it’s crucial to understand what you’re paying. Inside the Participant Fee Disclosure, you’ll want to look for the expense ratio of each investment option.

Check out this week’s episode on: Switching Plans and Saving Money During Medicare’s Annual Open Enrollment

Index Funds vs. Actively Managed Funds

One of the most effective ways to lower your investment fees is to focus on index funds. These funds track the performance of a specific market index, like the S&P 500, which includes the largest 500 companies in the U.S. Index funds are typically low-cost because they don’t require active management—there’s no need for expensive research, frequent trading, or the involvement of a fund manager.

On the other hand, actively managed funds are designed to outperform the market by picking individual stocks and securities. These funds generally cost more—about 1% to 2% more per year—because of the higher level of management and research involved. However, studies show that most actively managed funds fail to outperform their benchmark indexes over time.

For example, let’s say you invest in an actively managed fund that charges 1.5% in fees per year. Over 10 years, you could be missing out on the returns of a comparable index fund with a 0.1% fee, and that gap can be significant.

Making the Most of Your Investment Options

If your retirement plan offers index-based options, consider building your portfolio with these funds. This could include a mix of large-cap, mid-cap, and small-cap stocks for broad U.S. stock market exposure, as well as international stock funds for global diversification. You can also use bond index funds or stable value funds to round out the fixed-income portion of your portfolio.

If your retirement plan has limited options, look into whether it offers a brokerage window, which allows you to invest in a broader range of assets like mutual funds, ETFs, and even individual stocks.

If your plan doesn’t offer a brokerage window or good index fund options, and you’re paying high fees, you might want to consider rolling over your 401(k) to an IRA. With an IRA, you’ll have access to a much wider range of low-cost investment options.

Closing Thoughts

The first step in reducing your retirement plan fees is to obtain the Participant Fee Disclosure. After that, take the time to review the fees associated with your investments, and make adjustments where necessary. If you have access to index-based funds, use them. If you don’t, investigate the possibility of opening a brokerage window or rolling over your funds to an IRA when possible.

By keeping a close eye on fees and making thoughtful decisions about your investments, you can put yourself in a better position to build wealth for your retirement.

If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question. 

As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!

Written by Ryan Morrissey

Founder & CEO of Morrissey Wealth Management

Host of the Retire with Ryan Podcast