For the first time this year, the U.S. Department of Labor will require administrators of 401(k) plans, the companies that manage these accounts for employers, to disclose to employers and participants how much they are charging to operate these plans.
"A lot of employers are already putting their plans in place because they know this is going to create a lot of controversy," says Joseph W. Valletta, CFA and editor of "401k Averages Book," which helps plan administrators understand how their plans stack up.
Research by Valletta's firm shows that total plan costs on a 100-participant plan with a $50,000 average account balance range from 0.36 percent to 1.71 percent.
To put that in perspective, according to the Department of Labor, an employee with a 401(k) balance of $25,000 whose account makes a 7 percent return annually minus 0.5 percent in fees will see his balance hit about $227,000 by the time he retires 35 years later -- even if he makes no further contributions. Increase the fees to 1.5 percent, and that same employee's balance will drop to roughly $163,000 at retirement, a 28 percent reduction.
If you work for a small employer, you're likely paying more for your 401(k) than you would be if you were working for a large employer. That's because small employers don't get the economies of scale that large employers get, says Ed Ferrigno, vice president of Washington Affairs for the Plan Sponsor Council of America.
His organization says many large companies charge participants as little as 20 basis points -- about 0.20 percent -- while the small company average charge is 1.09 percent.
Ferrigno says young companies that recently started 401(k) plans and have lots of newly hired employees just opening their accounts will incur the most costs -- and they'll almost certainly be divvied up among participants.
Before you go marching into the boss' office to complain, remember he has his money tied up in this plan as well. It has long been the rule that the amount high earners in the firm get to invest is linked to the amount lower earners kick in. So Mr. Big Bucks has lots of motivation to see lower-paid employees saving in the 401(k) plan.
Until now, understanding the costs of a 401(k) hasn't been easy -- even for employers. So if the costs for the plan you're participating in are particularly high, there is every reason to believe your boss is just as unhappy as you are.