Hidden 401(k) Fees Are Stealing Your Nest Egg

Steven Winks, co-founder of the Society of Senior Consultants, an industry trade group, acknowledged that conflicts of interest exist and that sponsors must ensure they are getting truly objective counsel. "There needs to be an itemization of the services that are rendered" to make sure it's clear where the money goes, Winks said.

The Money Manager, and the Broker

Here's the big enchilada of 401(k) fees.

Since investment fees constitute as much as 95% of your 401(k) expenses, this is clearly the area that matters most. Unfortunately, there is a broad range of behavior among the firms that actually manage plan money -- fees, disclosed and undisclosed, vary greatly. "Expenses can run as low as 10 or 12 basis points to as high as 300 basis points," said Ted Benna, who designed the first 401(k) plan.

While there is tremendous competition among asset-management firms to win 401(k) business, "they usually don't compete directly on the basis of their fees," said Richard Hillman, director of the financial markets and community investment team at the General Accounting Office.

The mutual fund industry charges investors $70 billion a year in fees, according to The Great Mutual Fund Trap. Of that amount, $50 billion goes to fund firms in management fees and sales loads, and the rest, largely trading costs, goes to brokerage industry. Here's the problem: It is estimated that 85% of retirement industry revenue is asset based and not billed explicitly, making it especially hard for investors to see where their money goes.

Soft Dollars: The majority of mutual funds pay the sizable costs that go to brokers via revenue-sharing agreements known as "soft-dollar" payments. "Soft dollars are the way things get paid for," said McHenry's Harris. "They aren't inherently bad, but they do allow room for questionable practices."

Soft-dollar commissions to brokers came into effect in 1975, replacing the fixed trading commissions that were a "50 cents a share bonanza" for brokers, according to Plexus' Wagner. Briefly, here's how soft dollars work: Some money generated from commissions to the brokerage firms that execute your trades gets shared with mutual fund firms, who can use the soft dollars to pay for services such as research that ostensibly help funds better serve you.