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Frightening Fine Print

A government watchdog has confirmed something you probably already suspected, if you've ever tried to figure out how much your 401(k) fees cost: It's no easy task.

The Government Accountability Office, which conducts investigations requested by lawmakers, looked into the fees individuals pay in 401(k) retirement accounts. It found that two types of fees comprise most of the costs: investment fees and record-keeping or administrative fees.

More and more, plans pass the cost of record-keeping along to plan participants. But investment fees remain by far the largest expense in a workplace retirement account. They're almost entirely composed of the expenses charged by the fund you've invested in through your 401(k) account.

If you're a reasonably well-informed investor, you probably know you can find information about a mutual fund's expenses in its prospectus. Interestingly, the laws governing most 401(k) accounts don't require that the plan explicitly state the investment costs of each fund.

That makes it much harder to compare the costs of the investment choices in a plan. It also means that many people responsible for directing their own retirement investments may have no awareness of the fees, the report concluded. Investment professionals interviewed by the auditors said that, in their experience, "participants can be unaware that they pay any fees for their 401(k) investments and are particularly unaware of investment fees that are typically not quantified on account statements."

In other words, it's up to you to know that your 401(k) investments come with expenses, and it's up to you to go looking for them. Why does this matter, particularly when your 401(k) investment options may be severely limited? Because fees can take a big bite out of your retirement savings over time.

Using the example outlined in the report, suppose you had a 401(k) with an account balance of $20,000. If your investments grew by 7% each year and you paid 0.5% in fees, you would have about $70,500 in 20 years. Let's assume that you hold the same portfolio, but that your fees rise to 1.5%. That one change cuts your retirement balance by 17% over 20 years, to just $58,400.

More ominously, the report also found that the investment service providers that help plan sponsors set up the investment choices do not have to disclose whether they are paid (by a mutual fund company, for example) to steer plans and participants toward particular funds. That's another good reason to look closely at the fees.

This does not make 401(k) plans a bad investment. There are lots of benefits to a 401(k) plan, including automated savings and tax deferral. It does mean that you'll need to do a little homework before making your investment choices. (If you're not among the half of all workers contributing to an account, and your company offers a 401(k), hurry straight to your human resources or benefits department to sign up.)

You can find fee information for any mutual fund in a typical 401(k) in that fund's prospectus. You can call the mutual fund company to request one, but virtually all of them can be found online. Look for the fund's expense ratio and compare the funds you're interested in.

If you want to compare the effect that the fees on different mutual funds might have on your investments, NASD offers an online calculator that will compare three different mutual funds or exchange-traded funds.

For broad information about what to do with that retirement account, wander on over to the Foolish 401(k) Center.

Related Foolishness:

Want more advice on how to earn more money, save more money, and make your money work harder for you? Consider a free 30-day trial of the Fool's new personal-finance service,GreenLight.

Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article. She welcomes your feedback.


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