More than half of American workers depend on 401(k) plans as their primary retirement vehicle. Most of them have no idea how much of their savings never compounds, because it gets skimmed off in fees they never consciously agreed to pay.

A one-percentage-point difference in annual 401(k) fees can destroy 28% of a worker’s final retirement balance over a career. About four in ten participants don’t even know they’re paying fees at all. For readers focused on capital preservation, this is a structural leak in the most common savings vehicle in America, not a minor administrative detail.

The numbers are not abstract. The Department of Labor’s own example, as reported by CBS News, lays it out plainly: a worker with $25,000 in a 401(k), 35 years from retirement, paying 0.5% in annual fees would retire with roughly $227,000. The same worker paying 1.5% would end up with $163,000. That gap of $64,000 comes entirely from the compounding drag of fees. Nothing else changes.

The Awareness Gap Is the First Problem

A Government Accountability Office study found that approximately four in ten workers are not aware they pay any fees on their 401(k) accounts. The GAO report, identified as GAO-24-107125, noted that retirement plans typically face two categories of fees: administrative costs and investment-related costs. These can be borne by the worker, the employer, or split between the two. Most workers never ask which arrangement applies to them.

That ignorance is expensive. Teresa Hassara, Senior Vice President of Workplace Savings and Retirement Solutions at Principal Financial Group, put it simply: “There’s just not one standard.” Fee structures vary widely by plan size, investment menu, and service level. Workers at large employers may pay between 0.3% and 0.5% annually. Mid-sized plans typically run 0.5% to 1%. Small plans can charge 1% or more.

The mechanics behind that spread are simple. As Hassara explained:

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“In servicing a plan, there are fixed and variable costs. The fewer employees you have for those fixed costs to be distributed across, [that] can have some implications.”

Workers at small businesses, in other words, bear a disproportionate share of the overhead. And the investment options themselves carry their own layer of cost. “Some investment options have higher underlying investment expenses than others,” Hassara noted. A plan loaded with actively managed funds will charge more than one built around index funds, regardless of whether the active management delivers better returns.

When retirement savings targets keep climbing due to inflation, every basis point of unnecessary fee drag makes the gap harder to close.

Where the Fees Hide

The DOL breaks 401(k) fees into three categories. Investment fees are the largest component. These are indirect charges deducted from investment returns before the participant ever sees them. A fund with a 7% gross return and a 1% expense ratio delivers 6% to the investor. That missing percentage point never shows up as a line item on a statement. It simply vanishes into the spread between what the fund earned and what the participant received.

Administrative fees cover the operational plumbing: recordkeeping, accounting, customer service, and any investment advice offered through the plan. Individual service fees apply to optional features like hardship withdrawals or loan processing. These last two categories are more visible, but the investment fees do the real damage because they compound silently over decades.

The compounding math is brutal. A 1% annual fee costs 1% of your money every year, applied to a shrinking base, over a career that may span 30 or 40 years, not a one-time 1% cost. A 2014 Center for American Progress study, cited by the Washington Examiner, found that a typical 1% annual fee can erase approximately $70,000 from an average worker’s account over a 40-year career compared to lower-cost alternatives. The Center for American Progress study behind that figure modeled a 25-year-old earning median income of $30,500, contributing 5% with an employer match. At a 0.25% fee level, the account would reach $476,745 by retirement. At 1%, just $405,454.

Russel Kinnel, Director of Research at Morningstar, framed it bluntly: “Fees are a crucial determinant of how well you do.”

The Problem Gets Worse When Workers Leave

The fee drain does not stop when someone changes jobs. It can accelerate. Small 401(k) balances left behind when workers move on often get swept into so-called “Safe Harbor IRAs,” accounts that automatically receive orphaned balances. These accounts were designed as temporary holding vehicles. In practice, they become permanent traps.

A New York Post report detailed a PensionBee analysis projecting that by 2030, roughly 13 million Safe Harbor IRA accounts worth $43 billion will sit idle, hemorrhaging value through high fees and negligible returns. Monthly maintenance charges, enrollment fees, and closure fees can consume as much as 2% of the balance annually. Some providers impose enrollment fees as high as 20%, even when the participant never chose to enroll.

The numbers at the individual level are stark. A worker leaving a $4,500 balance in a Safe Harbor IRA earning 2% would retire with $5,507. The same balance in a traditional account earning 5% would grow to $25,856. That is a $20,000 gap from a single forgotten account.

PensionBee CEO Romi Savova did not hold back: “These accounts were designed to be temporary. In reality, most sit for years in cash-heavy products with fees that steadily erode savings.” The firm’s report went further, calling them “not savings vehicles” but “extraction mechanisms dressed as safety.”

For workers who leave the workforce earlier than planned, these orphaned accounts compound an already difficult situation. Every forgotten balance is a slow leak.

What Workers Can Actually Do

The disclosure infrastructure exists, even if most participants never use it. Hassara pointed to the annual 404(a)(5) notice that plan sponsors are required to send participants. “That will break out all of the fees for employees,” she said. Workers can also find fee information on quarterly account statements.

If fees change for any reason, employers are generally required to notify employees within a 30- to 90-day window. And Hassara noted that plan sponsors actively negotiate on behalf of participants:

“[Fees] will typically change because the plan sponsor is going to be negotiating on behalf of the participant and reviewing those fees very frequently to make sure they’re competitive with the marketplace.”

That sounds reassuring. But the GAO’s 2021 finding that 40% of workers don’t know they pay fees at all suggests the disclosure regime is not working as intended. A notice buried in a stack of HR paperwork is technically transparent and practically invisible.

The practical steps are simple, even if they require effort. Workers should locate their most recent 404(a)(5) notice and read it. They should check the expense ratios on every fund in their plan. They should compare those ratios to equivalent index funds available in the broader market. And they should track down any old 401(k) balances from previous employers before those accounts get swept into high-fee holding vehicles.

For those whose retirement savings have already fallen short, understanding the fee drag is a necessary first step toward recalibrating the plan.

The Bigger Picture for Capital Preservation

The 401(k) fee problem is a microcosm of a broader challenge facing savers. The system is designed around defaults that favor intermediaries. Fees are disclosed in ways that satisfy regulators but confuse participants. The compounding damage is enormous but invisible until it is too late to recover.

The Center for American Progress study found that workers in high-fee plans may need to work an extra three to four years to compensate for the money lost to fees. That is years of life spent earning back wealth that was quietly extracted, not a rounding error.

Hassara acknowledged that “cost and level of services often go hand in hand,” which is fair enough. Some plans deliver better investment options, better advice, and better administration. But the burden falls on the individual participant to determine whether the fees they are paying reflect real value or simply reflect the size of their employer and the inertia of the plan’s design.

When inflation is already eroding the real value of savings, a hidden 1% annual fee is a second tax on capital, levied by the financial system rather than the government, and just as effective at shrinking purchasing power over time, not a minor inconvenience.

  1. Large-plan fees: 0.3% to 0.5% annually
  2. Mid-sized-plan fees: 0.5% to 1% annually
  3. Small-plan fees: 1% or higher annually
  4. DOL example impact: 1% fee difference over 35 years turns $227,000 into $163,000
  5. Worker awareness: Roughly 4 in 10 don’t know they pay fees at all

The system works for people who pay attention. The trouble is, it was built knowing most people won’t.