A good 401(k) plan can be an amazing tool for helping to build your retirement nest egg. Most companies offer at least some level of employer match, and the tax deferral is a great perk. But if your 401(k) options come larded with excessive fees, it's a whole different story.

In this segment from the Motley Fool Answers January mailbag show, hosts Alison Southwick and Robert Brokamp -- and special guest Sean Gates, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool -- take a question from a listener whose friend is being hit with an up-front 5.75% sales fee, over and above the annual fees and expenses for the funds in his employers' plan. Their advice: You may need a lawyer, but it might be better to open the conversation a bit less adversarially.

A full transcript follows the video.

This video was recorded on Jan. 29, 2019.

Alison Southwick: The next question comes from Jim. "I was discussing 401(k) plans with a friend recently, and he showed me his statement." Wow, these are close friends! There are not many people in the world I would show my statement to. "He is paying a 5.75% sales fee upfront before the ongoing cost of the various funds. On the surface, it would seem that the plan doesn't meet the fiduciary responsibility.

"He said he asked his CEO about the plan and they won't change anything. The company doesn't provide any match, so I told him to stop contributing and use an IRA or brokerage account. Can you explain the responsibility of a plan administrator? Is there anything else that he can do?"

Sean Gates: It's a great question and very inside baseball. The responsibility rolls up to ERISA, which is the regulatory body that governs employer-provided plans. One thing that your friend can do, as a first step, is just make the CEO aware that he has a personal responsibility to provide fiduciary-level advice to his employees.

You can do that in subtle ways. You can give him reports. This is what's referred to as an "interested party." The people who actually administer the plan -- TPA people, record keepers, the actual plan administrator -- have a direct fiduciary responsibility to their employees.

But they're also interested parties, and under the new fiduciary rule that's being bandied about -- and then specifically under ERISA -- these interested parties also share responsibility. Just making him aware that he could be personally liable for any lawsuits that came against him for high-fee 401(k)s might nudge him in a different direction.

A harder step that you could take is you could initiate a class action lawsuit. There have been several over the last few years that have paid out massively, and they're not hard to prove. A 5.75% front load on a mutual fund will fall squarely in what they call "excessive fee classification." Ameriprise recently paid out $27.5 million. Boeing and Lockheed Martin had multimillion-dollar lawsuits. These lawsuits will normally be remunerative to the clients above and beyond. So it's base level, punitive damages, and then making clients whole for the fees that they paid over and above.

Southwick: It sounds like he works with a small employer if he's able to walk into a CEO's office and chat. For a class action lawsuit -- it's not a Boeing-size company.

Gates: Right. It might not be class action lawsuit. I just used those examples to say you could take legal action. If you get an independent lawyer on your own, they can also file an excessive fees lawsuit. Now, you could be worried about the ramifications of doing that in a small-employer environment. I don't fault you for that. That's why I suggested the first step be just let him know what he is responsible for.

Southwick: You've got a nice business, here. It'd be a shame if someone filed a lawsuit for your excessive mutual fund fees.

Gates: Exactly. But I think you're also in the right. If lawsuits are on the table, there's a pro/ con decision there, but these things are becoming more and more relevant. More and more lawsuits are coming up and being paid out. It's hard to justify these types of fees inside a 401(k).

Robert Brokamp: The reason the CEO is probably doing it is to save the company money, because it does cost a company to offer a 401(k) and then if they go to a broker or a financial advisor and say, "We want a 401(k) for our company, " she or he will say, "Well, we'll charge you this and make it easy on the employees or we won't charge you much and make the employees pay." That's what's going on here, probably.

The thing is over the last few years there have been many more providers aimed at small businesses with much more reasonable fees, so I would also look out there and maybe have an alternative to offer. Say, "Look, here's someone who's doing this pretty reasonably for small businesses."

Gates: That's a great point. I was going to say Betterment has a Betterment for Business program that's a very low cost and they specifically are trying to check the boxes of the different regulations. I think it's E38 of the fiduciary rules, and so you can present those as alternatives to the CEOs who might not know that there are cost-effective ways to implement 401(k) plans.

Brokamp: And I'll second Jim's advice to his friend in saying that I would first max out an IRA before I participate in a high-cost, no-match 401(k).

Southwick: We did an episode less than a year ago on what to do if your 401(k) plan stinks. That's not the exact title but look it up. It's a lot of Bro talking about other options and what you should do.

Sean Gates is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional.

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