Since 2012, the Department of Labor has required 401(k) retirement plans to provide the more than 87 million plan participants in the U.S. with a comprehensive disclosure of the fees they pay, but a GAO survey in the summer of 2020, weighted and generalizable to all 401(k) participants, showed that many people still do not understand how the fees work, or that they even exist. The explanations required by the department should make the impact of fees more clear, the GAO recommended, and the terms used should be more consistent. So how do they work and what can you do? The two main types of fees are investment fees, which are the largest component of 401(k) fees and reflect the costs associated with managing the investments made, and administration fees, which cover basic tasks like recordkeeping, legal, and trustee services. Generally, actively managed mutual funds charge higher fees because they have an investment advisor who monitors, researches, and actively trades to try to obtain a higher return on investment. Passive funds, whose holdings mirror an index like the Dow Jones Industrial Average to try to match those returns, don’t require as much monitoring so usually have lower fees.
