Investing in a 401(k) plan has been highly publicized and presented as a great alternative to other financial plans but the investments themselves are generally shrouded in mystery. The basic principle of 401(k) plans is that you make investments through your employer, distribute money to several funds and the rest sorts itself out. Given the automated process, you won’t feel any investment costs, if any.
At least that’s what you’re made to believe. In reality, your 401(k) plan is taking a piece of the pie. Being the investor, you’ll need to pay the expense ratio on certain funds while your employer will have to cover additional costs from the 401(k) provider itself, such as administrative fees, revenue-sharing fees as well as consulting and advisory fees. All these costs will eventually impact the overall return provided for employees.