Four Types of 401(k) Fees:

401(K) Investment fees are typically the largest chunk of fees associated with operating a 401(k) plan.

Investment fees are used to cover the cost of the specific funds that participants are invested in. Expenses of operating a fund include costs of the:

• Management team
• Administrative operations
• Sales charges
• Marketing of the fund

Investment fees are taken straight from the fund’s earnings. These expenses are broken into different segments that account for the different costs. The multiple segments of investment fees are:

• 12b-1 fees
• Sales charge
• Investment manager fees

When the above segments are added together, it is referred to as the expense ratio. The expense ratio is disclosed in a fund’s prospectus.

A fund’s prospectus explains:

• Investment objectives and strategies
• Fund’s past performance
• Background of the company
• Number of shares being issued
• Type of securities being offered
• Investment expense

This is not an exhaustive list of what is included in the prospectus, but a brief overview of important contents.

SEC rules require the disclosure of mutual funds marketing and distribution, and commission costs.

12b-1 fees are capped at 1% of assets and compensate the company managing and advertising the funds.

These fees are sometimes listed separately, but if not found in the fund’s prospectus are likely already factored into the expense ratio.

The charges have a tendency to be overlooked by individuals and potentially abused by commission-based financial advisors and/or third-party administrators. 

These parties may be able to collect additional commissions while avoiding the standard disclosures because investment management companies collect the fee and automatically distribute them to the commission-based advisor and/or third-party administrator. 

In these circumstances, the overall 401(k) fees are increased on average between 0.25% to 1.00% unbeknownst to the plan sponsor.

The sales charge or “load” is a portion of the expense ratio that is a commission for the mutual fund.

This fee goes directly to the financial intermediary that completes the transaction. The sales charge can be paid upfront when shares are purchased or when the shares are sold.

If the load is paid upfront, they will be charged as a percentage of the purchase lowering the total investment.

For example, if investing $10,000 with a 1% front-loaded fee, the total investment would be $9,900 with a $100 fee payment.

• $10,000 – investment into a mutual fund
• $100 – (1% front loaded fee)
• $9,900 investment remaining in the fund

Back-end loads are charged when shares are sold and usually decrease slowly as the assets are held. If the holding period is long enough the back-end load is usually waived.

The investment management fees are used to cover the operating costs and management of a fund.

They are commonly accounted for within the expense ratio of the fund’s prospectus. The largest element in this fee is funding the portfolio management.

Investment fees are taken directly from the plan as a percentage of total assets. The total amount charged by investment fees can vary greatly from plan to plan but should fall between 20 basis points and 2%.

Administrative fees cover the cost to operate the plan. Services such as:

• Plan set-up
• Recordkeeping
• Educational materials
• Processing account statements

These fees are typically charged either as a flat rate per participant or as a percentage of assets in the plan.

If the plan uses a Third-Party Administrator (TPA), their fee will also be a part of the administrative fees.

The TPA will deal with day-to-day aspects of the plan such as employee benefit statements, annually completing a 5500 form, or preparing loan paperwork.

The Administrative fees are typically called "recordkeeping"