The Seven Deadly Sins of 401(k) Plans

That's the good news, especially if the consultants provide independent, highly informed advice that isn't influenced by anything other than the potential benefits to their retirement planning. Of course, Wechsler and others acknowledge that the consulting business is rife with conflicts of interest that align the consultants' aims more squarely with those of the mutual fund firms.

Many consultants are also in the business of selling services to the very money managers that they recommend on behalf of their clients. And since consultants conduct the lion's share of their business through a few big mutual fund firms, they are eager to maintain favorable relations with them. "It's pay to play," said Trone of the Center for Fiduciary Studies.

Some of the biggest 401(k) consulting firms provide services to both plan sponsors and money managers, including Callan Associates and Mercer Consulting. Neither firm could be reached for comment for this story, but Callan's Web site details its efforts to reduce potential conflicts of interest, including "disclosure of all business activities and relationships."

With some outside consultants, "you are potentially replacing an ignorant arbiter on investment issues -- the participant -- with a conflicted arbiter," said Greenwich's Wechsler. "It's not clear you'll end up with better results."

Fourth Deadly Sin: Fund Firms Look Out for No. 1

It's easy to understand why the 401(k) business became so popular. Individuals and employers realized the benefits of a portable plan that was funded by workers. Meantime, mutual fund firms recognized a potential gold mine from a new, steady stream of pretax investments. While a number of firms take great care to carry out their fiduciary responsibilities in a way that balance investors' needs with their own, many mutual fund firms focus almost singularly on the marketing-driven pursuit to gather and retain assets while extracting the highest possible fees, with potentially devastating consequences to your nest egg.

"The mutual fund business is a great business -- if you happen to own a mutual fund business," Gensler said. "If you invest in the mutual fund business, it's not always the greatest thing."

The potential conflict of interest regarding mutual funds and 401(k) participants is self-evident: Firms would like to keep as much of your assets in their own funds, even if they aren't the best options, and implement a fee structure that funnels as much money as possible back into their coffers.

The fund industry acknowledges that disclosure and potential conflicts of interest exist in the 401(k) industry. "401(k)s have been a good way for about 44 million Americans to put their money in the market," said John Collins, spokesman for the Investment Company Institute, "but proper disclosure has not kept up with the demand for it. Participants should have a way to know everything that they are paying."

Fifth Deadly Sin: Excessive Fees -- Disclosed and Hidden

The abstract notions of conflicted consultants and mutual fund firms crystallize around one issue: fees. The greatest myth in the 401(k) arena is that the plans are "free," said McHenry Consulting's Harris. "Much of the costs in the 401(k) business have been less than fully disclosed. I know how much the Chevy dealer made on my truck, but I don't know how much Fidelity makes for managing my 401(k) plan."

The mutual fund industry is a highly competitive one, especially in the lucrative 401(k) arena -- and firms rely heavily on brokers, consultants and other financial-service professionals to peddle their wares. In exchange for services rendered from brokers and the like, fund firms have concocted a bevy of ways to pay back brokers. Some, such as load and 12b-1 fees, are disclosed; others take the form of "soft dollar" revenue-sharing agreements, such as excessively high trading commissions, which go largely undisclosed. Harold Bradley of the American Century fund family estimates that soft-dollar payments compose about four-fifths of the fees fund companies pay on trades. American Century doesn't engage in soft-dollar deals, but the majority of fund firms do.