Scenario 1: Individual Employee Contribution

Assume an employee contributes $20,000 annually to their 401(k) account. We’ll compare the account growth over 30 years with a 7% annual return and administrative fees of 0.5% versus 1.5%.

With 0.5% administrative fees:

• Initial contribution: $20,000
• After 30 years (7% return, 0.5% fees): $1,445,892

With 1.5% administrative fees:

• Initial contribution: $20,000
• After 30 years (7% return, 1.5% fees): $1,038,459

The 1% difference in administrative fees results in a $407,433 lower account balance after 30 years, a substantial 28% reduction in retirement savings.

Scenario 2: Company 401(k) Plan

Consider a company with a $10 million 401(k) plan and 100 employees. Assume the average account balance is $100,000 ($10 million / 100 employees).

If the plan charges 0.5% in administrative fees:

• Total annual administrative fees: $50,000 (0.5% of $10 million)
• Average annual fee per employee: $500 ($50,000 / 100 employees)

If the plan charges 1.5% in administrative fees:

• Total annual administrative fees: $150,000 (1.5% of $10 million)
• Average annual fee per employee: $1,500 ($150,000 / 100 employees)

The 1% higher administrative fee translates to an additional $1,000 in annual fees per employee, significantly impacting their long-term retirement savings.

Key Takeaways

• Higher 401(k) administrative fees compound over time, drastically reducing account balances at retirement.
• Employers should benchmark their plan’s fees against industry averages to ensure reasonableness.
• Paying lower administrative fees allows more of an employee’s contributions and investment returns to compound tax-deferred for retirement.