NEW YORK (MainStreet) – Of all the pieces in your financial life as an employee, it's your 401(k) that may be hardest to control or understand.

 

That's because plans are sponsored by employers, who decide who administers your plan and what investments you'll have access to.

The basic deal is that the employer matches your own contribution, up to a level it chooses, and you're permitted to put in more money, up to $17,500 per year, even more if you're 50 or over.

That money is then invested through an administrator chosen by the employer, and you hopefully collect the money at retirement. You may get a chance, once a year, to direct money into a menu of mutual funds. You may even be able to borrow against your balance.

Brightscope offers analysis and ratings of some large corporate plans, and the results can be eye-opening. A good plan can be costing hundreds of thousands of dollars more than a mediocre one, given the administration fees of the plan manager and the fees charged by the mutual funds it invests in.

As the light has shone on 401(k) plans, administration fees have gone down. A few years ago they averaged over 2%, off the top, every year. They're now averaging closer to 1%. Brightscope's research indicates that, in general, the smaller the group you're in, the higher the fees you're charged.

The main chance you have to control a 401(k) is when you change jobs. In theory you can keep the money where it is, roll it over into a new employer's plan, move that money into an Individual Retirement Account (IRA) or just cash out and pay taxes on the balance.

That's the theory. But some plans discourage former employees from staying on, while others have long delays in accepting "rollovers" from other plans.

The IRA choice is aggressively marketed by 401(k) administrators, because it keeps their own fees rolling in, and most consumers don't yet pay attention to the fees.

Ian Ayres, a Yale law professor, recently co-wrote a paper on high 401(k) fees with Quinn Curtis of the University of Virginia, then sent letters to 6,000 plan sponsors his research indicated were paying above-average fees.

The head of the plan administrators' trade group, Brian Graff, fired back with a blog post calling the letters "shocking" and "threatening." Brightscope, the source of much of Ayre's data, objected to use of its name, and the letters stopped.

Ayres himself is something of a gadfly. Since sending the letter he has gone on to suggest how to use an endowment to save journalism and questioned Microsoft's claims for its Bing search engine. His challenge to the industry looks to be a one-off.

The progressive group Demos calculated 401(k) fees in 2012 and concluded that, between the expense ratios and trading costs of most mutual funds, and the administrative fees charged by plan administrators, employees were losing one-third of their potential gains to fees.

A fund that claims a 7% return may only be giving plan participants two-thirds of that, the report said. Multiply this loss over a working lifetime, 30 years, and you're talking about hundreds of thousands of dollars.

Brightscope, for instance, counts my wife's plan as better than more than two-thirds of the plans out there. But the fund choices are confusing, she says, and she's trained in accounting. The funds charge trading costs and expenses, then the plan adds its fees, and according to Brightscope, she's out $171,000 she could have gotten with a top-rated plan.

But that's misleading. The choice of a plan, and a plan administrator, is totally at an employer's discretion. The employer doesn't have to offer a plan at all. Enron famously put most of employees' 401(k) money into its own stock, then went bankrupt and lost it all. Many other employers, like my wife's, also make their 401(k) contributions in the form of stock.

How do you avoid what happened to Enron's employees? The answer is diversification. That's what mutual funds are designed to provide. But there are expenses there, too.

So what can you do?

The first thing to do is get educated. Find out how much of your money is going out the door. Read the report your plan administrator is required to send you.

Calculate how much your plan is costing you in administrative fees, mutual fund expenses and trading fees, against the total return the funds are claiming. You may be wise to consolidate your money into fewer mutual funds with broad investment strategies, rather than using a lot of funds with narrow strategies, which can often charge higher fees.

If you decide your plan is costly, then only contribute what the employer matches, and consider opening a self-directed, low-fee IRA, with low-fee mutual funds for yourself. I have found that both Vanguard and Fidelity have many low-fee mutual fund options.

I have run my own Self-Employment IRA for some years, and it can be fun. All the stocks I own, which I disclose in every story I write for TheStreet, are in my IRA. I also keep some broadly-based, low-fee mutual funds there. I try to be conservative, I try to be diversified.

 

At least if I lose money, as I have on some investments, I'll know it's me who went to the dog track and not some investment hotshot who was taking a cut off the top, win or lose.

--Written by Dana Blankenhorn for MainStreet

 

At the time of publication, the author had about $340,000 in his SEP IRA.