What Are the Common 401k Rollover Fees?

A 401(k) rollover is the process of moving retirement funds from a previous employer’s plan to another retirement account, like an Individual Retirement Account (IRA) or a new employer’s 401(k). This action allows your savings to maintain their tax-deferred status, but the process can involve various costs. These fees can come from both your old plan and the new account you establish, making it important to understand them before proceeding.

Locating Fee Disclosures

Before initiating a rollover, the first step is to identify all potential costs by locating the fee disclosures for both your old and new accounts. For your existing 401(k), the primary document to review is the Summary Plan Description (SPD), which outlines the plan’s rules. You should also have received an annual fee disclosure statement, often referred to as a 404(a)(5) disclosure, which details plan-related fees. These documents are required by the Department of Labor and should be available from your former employer’s human resources department or the plan administrator.

These disclosures will list administrative fees, which cover the general management of the plan, and individual service fees, which are charged for specific transactions. For the new account, such as an IRA with a brokerage firm, you will need to find their fee schedule. This information is typically located on the firm’s website under headings like “Pricing,” “Commissions & Fees,” or within the account agreement prospectus.

Fees Charged by Your Old 401(k) Plan

When you move your funds out of a former employer’s 401(k), the plan administrator may charge several one-time, transaction-based fees. These are not ongoing investment costs but are specific to the act of closing and transferring your account. A common charge is an account closing or termination fee, which can range from $50 to $100.

Another potential cost is a check processing fee if you opt to have a physical check mailed to you or your new institution. This fee is typically in the range of $20 to $50. A more secure and often faster method is a wire transfer, but this usually comes with a higher cost, often between $25 and $75, to cover the bank charges for the electronic transfer of funds.

Costs Associated with the New Account

The cost structure of the new account, particularly an IRA, will impact your investments. While many financial institutions advertise no-fee rollovers, this often refers to the absence of a charge for opening the account or receiving funds. The more impactful costs are ongoing fees like annual account maintenance or custodial fees, which some firms charge to manage accounts below a certain threshold.

Trading commissions may apply if you plan to buy and sell individual stocks or exchange-traded funds (ETFs). The most significant ongoing cost, however, is typically the investment expense ratio. This annual fee, expressed as a percentage of your investment, covers the operating costs of a mutual fund or ETF.

Consider an account with a $100,000 balance. An investment with a 0.75% expense ratio costs you $750 per year, whereas one with a 0.25% expense ratio costs only $250. Over 20 or 30 years of compounding, this $500 annual difference can lead to tens of thousands of dollars less in your retirement account.

Executing the Rollover to Minimize Costs

The most common and safest method is a direct rollover, also known as a trustee-to-trustee transfer. In this process, the administrator of your old 401(k) plan sends the funds directly to the custodian of your new IRA or 401(k). Because you never take possession of the money, this method avoids any tax implications or deadlines.

An alternative is the indirect rollover, which presents more risks. Your old plan’s administrator sends you a check for your account balance, but is required to withhold a mandatory 20% for federal income taxes. You then have 60 days to deposit the full amount of the original distribution into a new retirement account.

To avoid taxes and penalties, you must use your own funds to make up for the 20% that was withheld. If you fail to deposit the full amount within the 60-day window, the distribution could be treated as a taxable withdrawal. If you are under age 59½, this could also trigger a 10% early withdrawal penalty.