What Is the Expense Ratio for a 401(k)?
Your 401(k) plan may be your most important retirement asset. A 401(k) plan is an employer-sponsored retirement plan. Traditional employer-sponsored retirement plans allow you to save money for retirement through your workplace using pretax deductions from your paycheck. However, these accounts are not free. Every 401(k) plan uses investments that have an expense ratio that eats into the savings in the account each year.
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Significance
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An expense ratio is a percentage of your total savings which is withdrawn from the account to pay for expenses associated with the 401(k) plan. These fees cover administration, broker commissions and transaction costs for any managed investments within the account. Because the fees are assessed every year, the expense ratio will affect the long-term value of your 401(k) account.
Benefit
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If fees are low, then you receive a greater benefit from the performance of the investments in the account. Low-load mutual funds and other investments with low expense ratios allow you to invest in your 401(k) at a reasonable cost, while still receiving investment returns tied directly to the stock market.
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Disadvantage
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According to John C. Bogle, founder of Vanguard, one of the largest mutual fund companies, the fees charged by most 401(k) plans are high. Expense ratios for many 401(k) plans cause the 401(k) participant to pay anywhere between 60 and 80 percent of his savings to fees inside the plan over the plan participant's lifetime.
Consideration
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See if you can switch your investments to low-cost investments inside of your 401(k) plan. Contact your 401(k) plan administrator about investment options. If your plan administrator offers an index mutual fund, this option is likely lower in cost than other managed investments inside of the account. These lower cost investment options will reduce your expense ratio in the plan, thus allowing you to keep more of your money for retirement.
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