Because 401 (k) plans offer limited investment options, you may be limited to buying only mutual fund shares, which usually charge higher fees than other types of securities that can be accessed with IRAs. By contrast, IRA investments usually have few or no fees. General fees, also known as “advisory fees”, are charged in perpetuity on the total account balance. Since IRAs are more flexible when it comes to investments, you can easily choose low-cost or no-cost options, but you also have the freedom to choose more expensive options if you want them.
However, the fees of 401 (k) investment funds in both their previous and new jobs are much lower than in the IRA, even though they are the same investment fund. An IRA is an individual retirement account that allows anyone with earned income (and even their spouse) to save for retirement with tax advantages. Like investment expenses, account-level fees have been reduced to zero or almost zero at most reputable providers. When people retire or change jobs, they often transfer their savings from an employer-sponsored retirement plan with lower institutional participation rates to IRAs.
Like most 401 (k) plans, some IRA providers charge custody fees simply because they have an open account. Employees can have the money deducted seamlessly from their paychecks and deposited into their accounts, making it easier for employees to participate in the plan and not feel like they are losing money. Both employer-sponsored retirement plans and IRAs make high and low-cost funds available to investors. Since higher rates erode subsequent profits, the magnitude of the reduction in savings is even more substantial than the magnitude of the increase in rates.
Next, we'll explain the most common types of fees for both 401 (k) and IRAs, what to consider when choosing a provider, and which type of account has the highest fees. Based on the average fees in table 2 above and assuming that mutual fund savings and rates of return that reflect savers' experiences, the differences between fees paid and account balances can be calculated with the Pew commission calculator. The main providers of automated IRAs or with robotic advisors usually charge between 0.20% and 0.36% in advisory and investment fees, although some companies offer even lower fees. Since you have much more control over where to store your IRA, try to find a provider that doesn't charge anything to open and maintain an account.
