Hidden 401(k) Fees Are Stealing Your Nest Egg

Another cost matter regarding how sponsors handle your money: In 401(k)s as in life, good deeds often get punished. If you are a more tenured employee with substantial assets in the plan, chances are you are subsidizing service costs of lower-balance peers. "The funding disparities among participants mean the excess the sponsor or service provider collects from you can pay for people with lighter balances," said Ward Harris of McHenry Consulting Group in Berkeley, Calif.

Here's how it works: Let's say the administration fees per plan participant are 30 basis points, or 0.3%. If your 20 years of investing has swelled your 401(k) nest egg to $500,000, your 0.3% tab is $1,500. As it turns out, $200 is probably enough to handle your fees. What happened to the other $1,300? Well, the less-tenured folks who have $10,000 in the plan only bring in $30 in 0.3% administration fees. That's $170 short. See where this is going? Your $1,300 comes in handy.

Now, many participants may be content with this fee arrangement. If not, ask the folks in human resources -- or whoever handles the 401(k) sponsorship matters at your employer -- exactly who is paying for the administration of your plan. If the answer isn't to your liking, remember: It's your plan, you have the right to demand a change.

"If employers can get a better deal, it is their fiduciary responsibility to do so," said Steve Lansing, founder of Orlando-based Sentinel Fiduciary Services, which consults companies on retirement plans. "Unfortunately, there is massive apathy and ignorance in the plan-sponsor arena."

Of course, many employers have done an outstanding job stewarding their 401(k) plans. Most genuinely aim to minimize the cost of these plans because it's in their best interest, too. Oftentimes, the problems stem from the same thing that bedevils participants: ignorance to how the fee structures work.

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"We have asked audiences of sponsors if they know how much they pay in administration fees, and 80% to 90% will say they don't know," said Joe Valletta, a principal with HR Investment Consultants, the Baltimore-based consultant that publishes the 401(k) Provider Directory Averages book.

Also, sponsors don't just take money out of your plan -- they also put a substantial amount back in via "employer matches" and profit-sharing plans. The average sponsor contribution in 401(k) plans is 2.5%, according to the Profit Sharing/401(k) Council of America. Sadly, however, that percentage is on the decline. What's worse, many workers opt to not enroll in their 401(k) plans, at a cost: An Access Research study estimated employees lose $5 billion annually in employer-matching contributions due to nonparticipation.

The Consultant

Here's a business rule of thumb: The more profitable an industry is, the more middlemen there are. Most 401(k) participants know there are two middlemen between them and their investments -- the employer/sponsor and the mutual fund firm. But guess what? In about half of all 401(k) plans, there's a middleman between those two middlemen: the consultant, according to Greenwich Associates. Oh, and you pay the consultant for being in the middle.