401(k) fees: devil in the nest egg -- Page 2

A good 401(k) plan gives participants a well-diversified selection of stock, bond and money market funds. Fund fees should be low since most plans would pay the institutional fee as opposed to the retail fee. According to Lipper, the mutual fund research company, the average institutional fee for all fund categories it tracks is 0.86 percent, while the corresponding average retail fee is 1.55 percent.

How low should fund expense fees be? Morningstar's Rekenthaler says no more than 75 basis points, or three-quarters of a percentage point, for stock funds, and no higher than 50 basis points for a fixed-income fund.

Rick Meigs uses a benchmark of 1.5 percent for stock funds.

"Anytime the expense ratio is above that, you're paying way too much. I'm being real liberal with 1.5 percent. There are some benefits you may be getting. If the plan sponsor decides it's in the best interest of their plan to pay 1.5 percent for an equity fund, I'm comfortable with that. But I'm not comfortable with it if they don't realize they're paying 1.5 percent because of insufficient transparency and disclosure."

Employees whose 401(k) is through an insurance company are actually getting a variable annuity instead of a true mutual fund. Annuities have a reputation for being expensive -- that may or may not be the case in a 401(k) plan. Usually, an insurance company hires subadvisers to manage the investment, so there's a middleman who's getting a fee. Again, the employee is heavily relying on the employer having done its homework.

"Typically, insurance products are going to be more expensive because there's a third party involved," says Meigs. "The general perception, whether right or wrong, is insurance company plans are more expensive. But there may be added value that the insurance company is providing -- education programs and servicing. I don't want to generalize because there are some outstanding insurance company 401(k) products."

Another element to be aware of with insurance company 401(k) plans is that you can't compare the annuity to the mutual fund on which it may be based. For example, the XYZ insurance company may offer a fund with a name such as "XYZ T. Rowe Price Spectrum."

"The annuities are, in most cases, a clone or a copy of an existing fund," according to Morningstar's Rekenthaler. "It's a perilous task to say, 'This fund has the same name, I should look at this mutual fund.' It may not even be a complete copy. Even though it may be patterned after it, it may be different.

"Whether you buy from an insurance company or from a mutual fund company, there will be overall fund costs and overall plan fees. You hope the employer understands that and makes an apples-to-apples comparison. You, as the consumer, aren't able to do that, but the corporate buyer better be doing that."

Fees are a hot issue in the world of mutual funds, and for good reason. Don't let fees steal thousands of dollars from your retirement account. Be fee-savvy from day one when you enroll in your company's plan. Too many employees focus on fees only after they've made some costly mistakes.

"I think it's an evolutionary process," says Ann Combs, assistant secretary of the Employee Benefits Security Administration at the U.S. Department of Labor.

"First you have to get employees to participate, then you need to get them to max their contributions so they get the employer match. Then you educate them about investment options, asset allocation and checking their quarterly statements. Fees are probably on a more sophisticated level that they learn as they go along."

EBSA's Web site provides a wealth of information about 401(k) fees, including a checklist you can use to review the fees in your company's plan. Your employer has a fiduciary responsibility to select a plan that's in the best interests of the employees and to make sure the fees are reasonable. If you have any complaints about your plan, including concerns about fees, talk to your plan administrator. If the administrator is unresponsive or you believe you're being stonewalled, call EBSA's toll-free number, 866-444-3272, to report your complaint.