401(k) vs. IRA Fees: Which Account Is Cheaper?

Both 401(k) plans and Individual Retirement Arrangements (IRAs) are tax-advantaged accounts designed to help individuals save for the future. While they share a common goal, the fees associated with each can differ significantly, impacting the long-term growth of your retirement savings. The structure of these accounts leads to distinct fee models that are important for savers to understand.

A Breakdown of 401(k) Fees

The costs associated with a 401(k) plan can be grouped into three categories, as defined by the U.S. Department of Labor. Plan administration fees cover services required to operate the plan, such as recordkeeping, accounting, and legal compliance. Depending on the employer’s arrangement, these fees might be paid by the company, passed to employees as a flat annual fee or a percentage of assets, or shared between both.

Investment fees are the costs related to managing the funds offered within the plan. The most common form is the expense ratio, an annual percentage deducted from a fund’s assets to cover its operating expenses. For example, an expense ratio of 0.50% means that for every $10,000 invested, $50 is deducted annually from the fund’s returns.

A final category is individual service fees, which are charged for specific actions taken by an employee. Common examples include fees for processing a loan from your 401(k) balance or executing a Qualified Domestic Relations Order (QDRO) during a divorce. These fees can range from $20 to over $150 depending on the service.

To understand all applicable costs, employees should consult their plan’s disclosure documents. The annual fee disclosure statement provides a detailed breakdown, and quarterly statements must show the actual dollar amount of fees deducted from a participant’s account.

A Breakdown of IRA Fees

Individual Retirement Arrangements have their own fee structure, which gives the account holder more control over costs. One common charge is an account maintenance or custodial fee. This is an annual fee charged by the brokerage, though many large custodians have eliminated them to attract customers.

Investment fees are also a component of IRA costs. In addition to the expense ratios on mutual funds and ETFs, you may encounter trading commissions if you buy and sell individual stocks or options. These can range from $0 at many discount brokers to higher amounts for complex trades.

For individuals who prefer not to manage their own investments, advisory fees are a consideration. If an IRA is managed by a financial advisor or a robo-advisor, a fee is charged for portfolio management. Human advisors often charge a percentage of assets under management (AUM) from 0.80% to 1.20% annually, while robo-advisors offer a lower-cost alternative, with fees in the 0.20% to 0.45% range.

Direct Fee Comparison and Key Distinctions

A primary distinction between the accounts is how administrative costs are handled. In a 401(k), these plan-level fees for services like recordkeeping can be subsidized or fully paid by the employer. This benefit does not exist with an IRA, where the individual is responsible for any account maintenance fees.

The approach to investment fees also differs. A 401(k) offers a limited menu of options, but because it pools the assets of many employees, it can often access institutional-class mutual funds. These funds carry lower expense ratios than the retail-class funds available to individual investors. Conversely, the vast investment freedom in an IRA allows an investor to seek out ultra-low-cost index funds and commission-free ETFs from a wide variety of providers. This gives the IRA holder direct control to build a portfolio with minimal expenses, an option that may not be available if their 401(k) plan’s menu is limited to higher-cost funds.

Fee Implications for Rollover Decisions

The decision to roll over a 401(k) from a previous employer into an IRA requires a careful analysis of the associated fees. The choice rests on a direct comparison of the total costs in your 401(k) versus what you would pay in a prospective IRA.

First, calculate the “all-in” cost of your existing 401(k) by adding any plan administration fees to the expense ratios of your funds. This information can be found on your annual fee disclosure statement. For example, a 0.15% administrative fee plus an average expense ratio of 0.40% results in a total annual cost of 0.55%.

Next, research the fee structure of a potential IRA, including any annual fees and the expense ratios of the funds you would choose. It is possible that the institutional funds in your 401(k) are cheaper than the retail versions available in an IRA; one study showed that rolling over to a more expensive fund could reduce a final balance by thousands over time. Conversely, if your 401(k) has high administrative fees and a limited selection of expensive funds, rolling over to a low-cost IRA with commission-free ETFs could generate significant savings.