Smart Retirement Savings

The Hidden Fees in 401(k) Plans

Good reminder from USA Today that it is too easy to losea couple of points in invisible fees in a 401(k). The problem is, you cannot switch 401(k) plans as you switch 529 plans, and I bet hardly anyone will leave a company just because a mediocre 401(k) plan.

The fees charged in 401(k) plans are all but invisible to investors who don't know where to look. Making matters more confusing are complex fee arrangements — common in retirement plans — that often lump together administrative and fund-management fees. Regulators are studying whether these arrangements inflate retirement-plan fees by making it hard for you to figure out how much individual services cost.

"If employees are paying more (than they need to), they have less money in their account to buy groceries when they get old and can't work any more," says Ward Harris, CEO of The McHenry Group, a financial consulting firm.

Because 401(k) accounts are often held for decades, and many people make minimal changes in their fund choices, high fees can drain significant money from a retirement nest egg over time. The impact may surprise you.

Let's say you have 35 years until retirement, a 401(k) balance of $25,000 and an average 7% return on investments per year. If fees shave a half-percentage point off returns, you'll have $227,000 at retirement (assuming you didn't contribute anything past the $25,000), according to the Labor Department. By comparison, if fees cut into returns by 1.5 percentage points, you'd end up with $163,000.