Hidden 401(k) Fees Are Stealing Your Nest Egg

There's an old poker truism: If you look around the table and can't tell who the sucker is, it's you. Sadly, this truism may be apt when it comes to some investors' 401(k) plans.

Americans have more than $1.75 trillion invested in 401(k) plans, yet most people spend more time fretting over $1.50 withdrawal fees at the ATM than the expenses that can easily cut their nest egg in half in three decades. While the tax-deferred virtues of 401(k) and other defined-contribution plans have led some to perceive these plans as "free," the reality is quite different.

Increasingly, the employer that sponsors the plan opts out on footing the bill -- effectively passing the expense on to you. Meanwhile, outside consultants collect substantial fees for their advisory role with the plan, while fund firms levy costly fees to manage your holdings -- not to mention paying brokers who execute their trades at nearly three times more than it would cost to make a trade in a Schwab(SCH Quote) individual account. Many times these fees won't show up on your 401(k) statements -- and if they do, they won't be clearly presented.

"The entire system is based upon picking your pocket," said Gary Gensler, former Undersecretary of the Treasury and co-author of The Great Mutual Fund Trap. "It is a round robin of money collecting where the individual gets left out."

Costs and conflicts of interest have increasingly become an issue for investors -- as highlighted by New York Attorney General Eliot Spitzer's $40 million settlement this week with a New Jersey hedge fund over allegations that it engaged in illegal trading in mutual funds.

The Seven Deadly Sins of 401(k) Plans

As investors finally consider it safe to track the market again, it's high time to examine how much they are paying in their 401(k) plans. They might be in for an unpleasant surprise.

"Frankly, when you were making 25% annual returns a few years ago, you had money to spend," said Wayne Wagner, founder of cost consultant Plexus Consulting Group in Los Angeles. "Now, when you're talking rates of return in the single digits and even negative single digits, the costs that you could tolerate in the 1990s become absolutely intolerable."

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