401(k) Fees Can Put Off Your Retirement

So how do you tell the necessary fees from the frivolous ones? The fees that investors can easily see are the fund's expense ratio, Hutcheson says, which may have some revenue sharing and commissions built in, such as 12(b)-1 and subtransfer agent fees; possible contract fees; and early-redemption fees if accounts are rebalanced too frequently.

A 12b-1 fee covers expenses for mutual funds companies such as the marketing and advertising of the funds. Sub-transfer agent fees cover the cost of handling participant transfers between the funds within with plan, including allowing access to accounts via telephone or the Internet. According to Hutcheson's testimony, approximately $2 billion is paid to third parties for such sub-accounting services.

The hidden fees, he says, are the brokerage commissions associated with buying and selling the underlying securities within a fund, which are reported on a fund's Statement of Additional Information. Funds are not required to provide the SAI, unless investors request it. "These trading costs and fees are hidden," Hutcheson says, "because they are only openly known between the fund managers and the brokerage firms who clear the associated trades.

"Also, participants generally do not see fees charged by the custodian, wrap fees, some investment adviser fees and any other fee or expense item that is charged to a plan as a pass through," he says. A wrap fee is a singular fee for a group of bundled services such as brokerage, research, advice and management, and is based on the value of assets under management.

Making fees more transparent will help investors create a prudent portfolio that has the potential of delivering desired results over a period of time. "Therefore, informed investors will make better decisions," Hutcheson says, "which will hopefully translate into more retirement income."

If you have concerns about paying unnecessary 401(k) fees, there are some courses of action you can take aside from finding a new employer or waiting for Congress to pass new laws. Here are some suggestions from Hutcheson and Weller:

• Ask your plan provider for an annual written statement describing all compensation received by the provider for plan services including the estimated costs of administration, recordkeeping, mutual fund management and administration fees.
• Is your plan utilizing low-cost index funds, actively managed retail funds or variable annuity contracts? Each of those variables can make a difference in overall costs, and therefore must be part of the equation.
• If the fees for your 401(k) plan are too high, bring it to the attention of the person in your company who runs the program. Often it is a not a fiduciary, but a human resources representative who may not be aware of the extra costs.