A litigious solution
There is a remedy against plans that offer really egregious share classes when better options are available. But it's a nuclear-level response.
"Class-action lawsuits are almost always the most important and powerful action against the plan sponsor in the improper use of the share classes. Many times the plan sponsor was not aware, but the law does not allow them to be unaware," says Jones.
Every 401(k) plan is required to have a named fiduciary or a responsible fiduciary. Often the plan sponsor is listed. In that case, because the plan sponsor has a fiduciary duty to pick investments that are in the best interest of plan participants, plan sponsors open themselves -- and their personal assets -- up to a lot of risk.
"(Participants) have only one recourse: to sue the employer. And they win," Morningstar says. "Under ERISA Section 409, it states that a participant can be made whole for a breach of fiduciary duties."
ERISA refers to the Employee Retirement Income Security Act of 1974. The federal law establishes minimum standards for retirement plans offered in the private sector.
Some high-profile lawsuits in recent years have set the bar for the level of care required by fiduciaries to a retirement plan. They all boil down to a simple concept: "Are the people getting paid from plan assets performing an important service for plan participants? And are they getting compensated reasonably? Or are they getting overcompensated," says Marcia Wagner, managing director of The Wagner Law Group in Boston.
"This is an area where there has been some abuse, particularly, but not only, in the retail arena where fees were not transparent. There were 12b-1 fees and revenue sharing; it wasn't clear who was getting paid by whom and when," she says.
Other options than lawsuits
Most people probably don't want to sue their employer, and their employer probably doesn't want to offer a bad plan. Before talk of lawsuits begins, plan participants should approach their employer.
"Gather documentation and find other employees that have similar concerns. Provide documentation to the employer and ask to be involved," says Morningstar.
The site Brightscope.com puts 401(k) plans in context for participants. Many workers can see how their plan falls in line with similar-size companies in their industry. Viewing the plan in that context could nudge plan sponsors to make changes to a lackluster 401(k).
"Companies don't want to spend money that is not appreciated by the employees," says David Littell, co-director of the New York Life Center for Retirement Income at the American College of Financial Services in Bryn Mawr, Pa. They are spending money on it and if they find out no one is happy with it, then they will make it better."
Working around a suboptimal plan
Rick Meigs agrees that employees concerned about the quality of their employer's retirement plan should take their concerns to the employer.
"Remember that the boss also has to use the same crummy plan, so they may be motivated to make some fixes," says Meigs, who is president of 401khelpcenter.com, a retirement plan research site.
If fixing your company plan isn't possible, then married or otherwise committed couples could focus on fully funding the better plan in the family. However, if your employer offers a match, be sure to contribute enough to get that free money.
"Consider opening an (individual retirement account) or a Roth IRA at a low-cost provider and maximizing your contributions through it," says Meigs. The 401(k) could be used for overflow if you're able to save more than the maximum allowed in an IRA ($5,500 in 2013; $6,000 for those ages 50 and up).
Awareness helps as well. The minimum that employees need to build wealth are reasonable fees and a quality assortment of investments. The 401(k) can be the cornerstone of a retirement plan or just a piece of it. Knowing the strengths and limitations of your plan can help you draft the most effective investment strategy for a wealthy retirement.