Paring 401(k) Expenses

September 11, 2012 | | The New York Times |

NOW that some sunshine is being shed on 401(k) expenses, it’s time to see how you can improve returns by lowering the costs of the middlemen.

Thanks to a new Labor Department rule that required sponsors to supply employee plan transparency statements by the end of August, a window has been opened on these expenses, which were previously difficult to ferret out. Disclosures are required for employers and employees on what fees are being charged by 401(k) administrators, bookkeepers, fund managers and other middlemen. Fees on these accounts contribute to a reverse compounding over time. Instead of adding wealth, expenses deplete your nest egg, often compromising a comfortable retirement. These charges can be onerous if you’re among the nearly 50 million employees with a 401(k)-type plan. Your reaction to seeing the extent and impact of these charges may range from shock to confusion, but it’s important to see it through the lens of maximizing your retirement kitty.

According to a study published by the progressive research group Demos, 401(k) fees can cost a higher-income, dual-earner household about $278,000 over a working lifetime. Even if you’ve done well with the funds within your 401(k), fees can consume nearly one-third of investment returns.

“When plan sponsors and participants have more information about the costs involved with their retirement savings, they are empowered to make more informed choices such as selecting an investment fund provider with better net-of-fees returns or lower-cost retirement service providers,” Phyllis C. Borzi, an assistant labor secretary, said in an e-mailed statement.