Being cheated out of money you deserve is bad enough, but many Americans are being cheated out of money they didn't even know they deserved. For many people who are otherwise diligent in their retirement planning, this has been happening for years.

A recent study (link opens PDF) by professors from the University of Virginia and Yale highlights the one big way that employees are mising out on an optimal retirement portfolio through no fault of their own.

Retirement planning can involve lots of paperwork. Make sure your employer is doing right by you. Photo: John Patrick Robichaud via Flickr.

Before we dive into how you might be getting shafted by your 401(k) plan, let's make one thing clear: We make tons of investing mistakes on our own, too. Two weeks ago, I highlighted those mistakes. Before marching off to your HR department to complain about retirement plans, make sure you aren't guilty of these oversights.

Source: via Flickr.

Fees, fees, and more fees
When you put money away in a 401(k) or a 403(b), you have a set menu of investment options to choose from. Those menu options are determined by the company hired to administer your retirement plans.

The study found that, on average, the investment options are broad enough to offer acceptable diversity within one's holdings. The major problem with these options, however, was referred to as "fund fee loss." In plain English, this means that the plans available to employees had fees that were so high that, over time, they ate away at savers' returns.

How much of a problem was this?

When combined with the overall costs to administer a plan, they accounted for an average 10.2% loss on optimal returns. This could mean, for example, fallingĀ $102,000 short of a $1 million savings goal through no fault of your own.

Don't accept these
Fees can come in many forms. In general, these are the ones you should try hardest to avoid:

  • High expense ratios: An expense ratio is the percentage of your balance that is taken every year to pay those who are managing your money. While a 1% expense ratio might sound small, it can rob you of hundreds of thousands of dollars over a decades-long time period. Shoot for options with an expense ratio below 0.5%.
  • Front-end loads: These represent a percentage of your hard-earned money that needs to be paid before you can invest with a fund. Some of these fees are as high as 5%. There's no good reason you should ever have to pay a front-end load unless it's a fund you are absolutely sure you want to invest with.
  • Back-end loads: These are the same as front-end loads, except you pay the fees when you pull money out of a fund. Again, you should never have to pay this unless you are absolutely certain it's a fund that you want to invest with.

What to demand from your employer
While there's no one-size-fits-all approach to retirement planning, the study's authors had some broad suggestions to help maximize your returns. Most notably, they said, "Adding index fund options would benefit most plans."

That's because index funds, unlike mutual funds, are not actively managed. Index funds simply aim to match the performance of certain benchmarks, such as the S&P 500. While that may sound unexciting, it's important to consider that almost every study conducted shows that, after fees, the majority of mutual funds underperform their benchmarks in the long run.

More specifically, the study pointed out that 401(k) plans that offer options from Vanguard are the most cost-efficient. In fact, the study's authors used a portfolio constructed with Vanguard-only funds as the benchmark for optimal portfolios.

On the whole, Vanguard-only 401(k) plans had lower fiduciary losses than 95% of the sample plans the study's authors accumulated.

So the next time you go to meet your HR representative, ask whether your 401(k) offers Vanguard options. If it doesn't, ask why and demand that steps be taken to include them in the future. This is one part of retirement planning you can't afford to overlook.