Can Index Funds Fix Your 401(k) Fee Problem?

Index Funds Could Help Cut Your Retirement Saving Costs.

Retired couple.
By + More

The reason is partly that there are certain minimum costs, some required by regulation, that plans pay regardless of how many employees participate. These costs are naturally higher relative to total assets for the smaller plans, though they shrink, in relative terms, as the plan grows and achieves economies of scale.

[See Understanding Your Mutual Funds' Portfolios.]

"The smaller employers are paying retail for their investment management, plus they have to pay for administration and compliance services on top of that," says Wray.

Another determinant of fees is the proportion of fund assets invested in equities, which typically entail higher expenses than bonds. Even actively managed bond funds, whose expenses averaged 0.66 percent in 2011, are cheaper than actively managed equity funds (the 0.93 percent mentioned above), says the ICI. (There's not much difference between the expenses on equity and bond index funds—0.13 percent and 0.14 percent, respectively, according to ICI data.)

So, want to get your 401(k) fees down? Buy index funds, and go work for a big company. Says Wray: "The people who are in plans with fewer than 50 employees are paying much, much higher fees than the companies where there are 5,000 or more participants."