02 Nov 401(k) plans and hidden fees

Q. Whenever I move funds around in my 401(k) — my spouse and I have five altogether — I am not charged anything, and I can freely rebalance existing balances any time I like. But within my IRA, I am charged $7 or $9 any time I move them around, so I’ve been hesitant to roll all these 401(k)s into an IRA. Are there hidden fees in my 401(k) that I don’t know about ?
— Investor

A. Your 401(k) plans certainly have fees, but you have to look for them.

Back in 2012, the Department of Labor issued regulations requiring fee disclosures to be made to participants in retirement plans governed by ERISA, which includes 401(k) plans, said Howard Hook, certified financial planner and certified public accountant with EKS Associates in Princeton.

Assuming the plan provider is complying with the rules, there should be no hidden fees, Hook said.

But, he said, the fee schedules are not always easy to read or understand.

Because it sounds like you don’t pay any fees to buy and sell in the 401(k) plan, you may want to look at the expense ratio charged by the funds in the plan, Hook said.

“One of the ways that plan expenses are paid for is through the use of higher expense ratio fees,” he said. “For example, ABC mutual fund has an expense ratio of .50 percent if purchased in a brokerage or IRA account, but in a 401(k) plan, the expense ratio may cost .75 percent.”

The additional .25 percent is used to play plan expenses, Hook said.

Hook said a more recent Department of Labor ruling requires advisors to evaluate whether rolling over a 401(k) to an IRA managed by the advisor will be more expensive for the client.

“If it is, the advisor will need to document that there are other reasons why rolling the 401(k) plan to an IRA is still the `best interests of the client,’” Hook said. “If you do not use an advisor, then unfortunately you would be on your own in determining which is less expensive.”

It sounds like the $9 fee you are paying is a transaction fee in your IRA.

An alternate solution would be to find a different custodian which allows you to purchase certain investments and pay no transaction fee, he said.

“Be advised however, that no transaction fee funds sometimes also carry higher expense ratios than transaction fee funds,” he said. “Buying a fund which charges a $7 transaction fee but carries a lower expense ratio may be less costly especially if you do not intend to trade the fund often.”

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This post was first published in November 2016.