What investors should know about the Fidelity 401(k) 

Many American workers will say that a 401(k) with a 401(k) employer match is their top preference when it comes to employee retirement plans. The 401(k) plan is still one of the most preferred retirement savings vehicles due to its employer match, tax-free growth and tax-free withdrawals upon retirement.  

But as with all 401(k) plans, this retirement plan is handled by a separate financial services institution, usually chosen by your employer. In this article we will focus on an investment product, the 401(k) handled by Fidelity Investments or what they call Fidelity 401(k).  

InvestmentNews will delve into important questions about the Fidelity 401(k) like:  

• is Fidelity 401(k) any good?  
• what happens to your Fidelity 401(k) when you quit your job?  
• which Fidelity 401(k) is the best? 

We’ll tackle these and other important questions in this article.  

What is Fidelity?  

Fidelity is the common name of Fidelity Investments, formerly known as Fidelity Management & Research (FMR). Fidelity is an American financial services company headquartered in Boston, Massachusetts. Established in 1946, Fidelity remains as one of the largest asset managers in the world, with an AUM amounting to $10.3 trillion as of 2022.  

How does Fidelity handle 401(k) plans? 

To service its 401(k) plan participants, Fidelity has a separate business division called Fidelity Personal, Workplace and Institutional Services (PWIS). This is the largest 401(k) retirement plan services provider with $1.4 trillion in Assets Under Administration (AUA) and $32 billion in total contribution assets.   

Why is the 401(k) preferred by employees for retirement savings?  

Many American employees prefer and continually place their trust in the 401(k) plan is due to its many tax benefits. Another unique feature of the 401(k) plan is the employer match feature where the employer “matches” their employees’ contributions in full or in part. 

Each time an employee contributes money from their paycheck to their 401(k), their employer makes an equivalent or partial match. For example, if you’re an employee just starting out and elect to have 3% of your salary go to your 401(k), your employer could place another 3% of your salary into the plan. 

This is essentially free money from your employer that can potentially double the amount in your retirement savings plan.   

How does the Fidelity 401(k) plan work? 

As with other service providers, the Fidelity 401(k) works by allowing plan holders to contribute part of their paychecks to their 401(k) account.  

Once a plan owner contributes to a Fidelity 401(k), they can invest in a variety of assets like mutual funds, index funds or target date funds offered in their employer’s plan.  

By investing the money you contribute, you benefit from compounding returns on the investment earnings, growing your retirement nest egg. You can also enjoy tax breaks.  

Since this is a traditional 401(k), the contributions are made with pre-tax money. It doesn’t get taxed until the account owner withdraws the money when they retire.  

There are two types of 401(k) plans, and you can get either plan, or even both with Fidelity. For a quick comparison, here are their similarities and differences:  

Traditional 401(k)		Roth 401(k)
Similarities
Both are employer-sponsored
Both can have employer matching
Both plans have no income limits for participation
Both plans have contributions automatically deducted from employees’ paychecks
Both plans have the same contribution limits
Differences
Traditional 401(k)		Roth 401(k)
Taxes on contributions	Tax-deferred until withdrawal; reduces gross income during employee’s productive years	Contributions are taxed, but withdrawals are tax-free
Taxes on distributions	Money withdrawn in retirement is taxed as income	No taxes on distributions or earnings when taking qualified distributions (as long as the five-year rule is met)
Employer Matches	Matching funds are pre-tax	Matching funds for a Roth 401(k) go into a traditional 401(k) and are pre-tax
Rules for Withdrawals	10% early withdrawal penalty, plus taxes if made before age 59½	10% early withdrawal penalty, taxes if made before 59½, must meet the five-year rule

Is the Fidelity 401(k) plan free? 

The answer is both yes and no. While it’s free to open a Fidelity 401(k) account, there are certain charges like commissions, interest charges and other transaction fees. These fees can apply to: 

• mutual funds 
• index funds 
• managed accounts  
• specific Health Savings Accounts (HSAs) 

There is a list of commissions and other fees charged by Fidelity on their investment products.  

Here’s a video that shows in detail the process of setting up your Fidelity 401(k): 

There will be areas where you will need to look at the fine print regarding fees. Be sure to read the plan’s terms and conditions to fully understand any cost implications. You will also see that the account offers free use of calculators for Take-home pay and contributions.   

What are the fees in a Fidelity 401(k)? 

While Fidelity has removed some fees on other products in recent years, it was recently discovered that Fidelity charges “hidden” administration fees that can lower plan participants’ investment returns.  

About 70% of these fees are structured via a revenue-sharing scheme. Most plan sponsors or participants are unaware of these fees, as they’re often charged not as a set amount, but as a percentage of plan assets.  

What this means is that Fidelity automatically charges proportionally higher administrative fees as the assets grow, while delivering the same level of service. Factoring in compound interest, the admin fees can make a significant dent in plan participants’ retirement savings in the long term.  

How to find Fidelity’s “hidden fees” in your 401(k) 

Seeing how much Fidelity charges for your 401(k) plan administration is important, since you can compare their fees to the industry average and other lower-cost 401(k) providers. You and/or your plan sponsors may then want to decide whether to stay on with Fidelity or seek alternative providers. Here’s how you can look for Fidelity’s fees.  

Step 1. Download a pre-formatted spreadsheet to help you determine the fees 

Once you’ve opened the spreadsheet in step 2, fill in the appropriate information in the highlighted cells.  

Step 2. Gather important information from relevant documents 

The only document you’ll need from your Fidelity 401(k) plan is the 408(b)(2) Fee Disclosure. You can find this as Fidelity’s “Statement of Services and Compensation”. This can be accessed on their employer website.     

If you hired an outside financial advisor, you must factor in their fees. The advisor fees are usually indicated on their invoice or in their services agreement.  

Step 3. Find Fidelity’s administration fees 

These can be in two forms: direct and indirect. Direct fees can be charged to your company’s corporate bank account or from individual participants’ accounts. 

Indirect funds, meanwhile, are paid from investment fund expenses, which can reduce overall returns.    

You can find the direct fees on Fidelity’s “Administrative and Recordkeeping Services and Compensation” page, on the 408(b)(2) Fee Disclosure.  

Step 4. Uncover the “hidden” fees 

For Fidelity’s 401(k), a type of “indirect fee” is charged to the operating expenses of some mutual funds. This is a form of revenue sharing, and comes in two forms:  

• Sub-Transfer Agency (sub-TA) fees: payments for a recordkeeper 
• 12b-1 fees: payments for a financial advisor 

These forms of revenue sharing are not reflected in Fidelity’s fee disclosure document. They are instead embedded in the expense ratio of 401(k) plan funds, so they’re rarely noticed. These “hidden” admin fees are shown as a percentage of assets in “Appendix B – Investment” portion of the Disclosure of Services and Fees (highlighted in red). 

Before proceeding with the next step, multiply each revenue sharing percentage and fee percentage by the appropriate fund balance. These should give you the indirect fees that Fidelity charges.  

Step 5. Calculate the all-in fees for your Fidelity 401(k) 

For this step, start by entering the fund information from the Fidelity 408(b)(2) document into the spreadsheet. The formulas on the spreadsheet should work, and automatically calculate Fidelity’s indirect fees.  

As for the direct fees, enter each amount into the appropriate line item near the end of the spreadsheet. 

If an outside advisor was consulted, enter their fees as well. By now, all the admin fees and investment expenses (less indirect fees) should be totaled, resulting in the all-in fee of your Fidelity plan.  

For a clearer picture of how Fidelity 401(k) fares against other plans, you can express the resulting amount as a percentage of plan assets. Take note: 401(k) plan fees can vary widely, ranging from 0.5% to 2%. To know if your Fidelity 401(k) is worth its fees, you can: 

• check if it’s within the industry range  
• consider the size of your employer’s plan  
• consider the number of participants 

Can I lower my Fidelity 401(k) fees? 

Yes, it’s possible to lower your 401(k) fees with Fidelity, but that usually means keeping them as the plan provider and working with their available options. Here are possible ways you can lower your Fidelity 401(k) plan’s fees:  

1. Appeal to your employer 

If you think the fund choices in your company’s 401(k) plan can be better, research on potential fund improvements and then present your recommendations to your employer.  

Remember that your employer has a fiduciary duty to select the best-performing investments for reasonable fees. They have a continuing obligation to replace overpriced funds when necessary.  

There is a good chance that your employer and/or plan administrator may let you state your case and make suggestions, especially when their own investment returns are also at stake.  

2. Switch to index funds 

Your employer decides which funds make up your 401(k)’s investment choices. In most cases, they choose a blend of:  

• actively managed funds to try and outperform the market index benchmark 
• passively managed funds to try and match a market index 

The problem with this setup is that actively-managed funds often cost more and underperform compared to their market index benchmarks over the course of time. With the actively-managed funds, your 401(k) could be seeing lower returns for higher fees. If investments like Fidelity mutual funds are earning less than the average market returns, then replace them with index funds that are available in your plan.  

3. Move your 401(k) assets to an IRA 

This is a last resort if you find that your Fidelity 401(k) still has investments with high fees. Roll your funds into an IRA that has low-cost funds, if you are eligible for an account distribution.  

Most other IRA providers can give you access to target date funds, low-cost index funds, and even ETFs without charging high administration fees. Don’t forget to continue making contributions if you still work for the plan sponsor – this will ensure that you maximize the employer match.  

What happens to your Fidelity 401(k) if you leave your job?  

Typically, an employee has four options for their 401(k) if they leave their job. They can:  

1. Keep the plan with their previous employer 
2. Do an IRA rollover 
3. Roll over to their new employer’s 401(k) plan 
4. Withdraw the money 

If the employee chooses to keep their 401(k) plan with their former employer, they can no longer contribute to the plan. They must also do any of the other options at some point, since they may forget about the plan and not get the money. It’s not uncommon for plan holders to pass away and leave a trail of 401(k) plan money their heirs didn’t know existed.  

Does Fidelity 401(k) allow for crypto investment? 

Yes. Fidelity is the first 401(k) retirement plan provider to offer bitcoin as part of 401(k) plans.  

There are a couple of caveats:  

• employees are only able to add bitcoin to their 401(k) if their employer allows it 
• employers have a fiduciary duty to offer prudent investment options; the US Department of Labor does not consider bitcoin and other cryptocurrencies as “prudent” investments 

It remains to be seen how many employers with Fidelity 401(k) plans will or have allowed their staff to buy Bitcoin in this way and at what volume. While there’s growing demand for cryptocurrencies in 401(k)s among younger workers, savvy investors are wary of their volatility.  

Is a Fidelity 401(k) plan worth it? 

Given the high fees, is the Fidelity 401(k) plan worth it? The answer is not a definitive yes or no, as it can depend on the individual investor.  

If Fidelity’s 401(k) fees do not go past the industry average of 2%, the plan should not differ much from other providers and could still be worth having. But whether it’s worth it or not ultimately depends on the investor’s time horizon, investment goals, risk tolerance and financial circumstances. Investors can choose other lower-cost investments in the plan or seek alternative providers if they are no longer satisfied.   

Find more information about retirement plans and other important investment topics here on InvestmentNews.