No one would choose to postpone retirement for several years just to pay off 401(k) fees.

Many people, though, unwittingly are doing just that.

"People understand that 401(k)s cost money, but they never translate it into how much money that really is," says Christian Weller, a senior fellow at the Center for American Progress, a Washington, D.C.-based nonpartisan research and educational institute. "And these fees are steadily eating away at their retirement."

The key for consumers, then, is to be able to sniff out hidden fees.

Weller estimates the average annual fee for 401(k) plans ranges between 1% and 2%, which he says is a "quite substantial" difference. Just 1% can mean having to put off retirement by almost three years, according to his calculations.

The solution, he says, is for plan sponsors and administrators to make the fees substantially more transparent and to make them easily understandable. "You don't want to make people look at 30 pages and have the fee structure on page 29 in fine print," he says. "You want all the fees expressed in comparable terms -- either in dollar amounts or in percentage of assets."

No law explicitly requires disclosure to investors of comprehensive information on 401(k) plan fees. But Matthew Hutcheson, an independent pension fiduciary, testified before Congress in March about a growing movement to change this.

Hutcheson told the U.S House of Representative's Committee on Education and Labor that there are competing interests between sponsors needing to provide the most efficient retirement savings plans for workers, and financial companies that profit off the fees for these plans. As a result, he says, many 401(k) participants are paying more than should be necessary to run their retirement plan.

To illustrate his point, Hutcheson uses the example of two 30-year-old workers who each invest $3,000 a year into their 401(k) plans. The first worker's 401(k) plan is "run according to stringent fiduciary principles," which means no unnecessary fees, and earns a 7.5% annual return. The second worker's plan "is operated by conflicted, sales-driven entities" and earns only 6% due to fees.

Hutcheson says that the difference between the two workers' savings rates translates to more than $80,000 over the course of a 30-year career, and nearly $500,000 over a 47-year period. "Consider the impact on that worker's ability to pay for health care, prescription drugs, home repairs or even groceries."

Because it costs money to run a 401(k), no one should expect they can avoid paying any fees. But Hutcheson spells out how to tell necessary fees from exorbitant ones.

How 401(k) Fees Can Shorten Your Retirement
Annual Fees As Share of Assets (%) Reduction in Asset Accumulation* (%) Additional Months Required To Make Up Loss**
0.5 11.6 16
1 24.2 32
1.5 37.7 48
2 52.3 64
* Compared with no fees.
**Adjusted for inflation.
Source: Center For American Progress

The latter can be identified because they "simply cannot be justified when viewed through the lens of true fiduciary prudence," he says. He says full transparency of all service provider activities and costs would allow participants to better understand the decisions regarding plan investments and operations. "With improved understanding, the retirement-income security of millions of Americans would be enhanced."

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.

Michael Katz has been a reporter at Forbes and an editor for two custom publishers, SmartMoney Custom Solutions and HNW Inc. He also worked in London as a freelance media reporter and foreign correspondent for Broadcasting & Cable magazine.