Lurking below: Investment fees, often disguised from view, account for more than 80 percent of the total costs of the average 401(k) plan.
 
  Brokers and 401(k) providers often claim to sell inexpensive 401(k) plans, sometimes even promising to operate plans for free. Here’s how they do it: Providers offset up-front discounts by making employees select from investments with very expensive fees.
 
  While an investment with 1.4% fees might not sound like much, a mere 1% increase in fees can decrease the value of a $100,000 investment by $66,254 over 20 years, assuming an annual return of 7%.
 
A Hidden Parasite
 

Unlike administrative fees, investment fees are not directly billed. Instead they are subtracted from individuals’ account balances each reporting period, reducing individual returns, often without knowledge of investors. These fees are not one-time charges, but are deducted from individuals’ accounts for as long as they participate in the plan. And since investment fees grow as individual accounts balances grow, those who save the most are penalized the harshest.

Plan providers rarely discuss investment fees. In fact, by law they are only required to disclose investment fees during enrollment, after employers have purchased the plan, making it almost impossible for participants and employers to effectively comparison shop.1
 
Beware the Class of Share
  Employees are often impressed with a wide range of investment options in their 401(k) plan. Most plans offer household-name investments, often from prestigious Wall Street investment firms. However, few employees realize that their broker or 401(k) provider may have direct incentive to steer them away from the best investments that made the funds famous. Instead, 401(k) investors may find themselves with funds that perform worse than their peer group or even with “B,” “C” or “F” class shares, which carry the highest fees. To learn more about commissions and different classes of investments, click here.
 
A Better Alternative
  Before signing up for a 401(k) plan, employers should require a full accounting of all investment fees, which include management fees, expense ratios, commissions and 12b-1 fees. They should also require that employees receive full disclosure of these fees each reporting period.
 
  Employee Fiduciary  makes this commitment. And our fees are the lowest in the business.
 
 

1 For a thorough discussion on fees, see “Testimony of Mercer E. Bullard on Fee and Related Disclosure to 401(k) Plan Participants, before the Advisory Council on Employee Welfare and Pension Benefit Plans, U.S. Department of Labor,” Aug. 5, 2004.