What Your 401(k) Really Costs You

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"There shouldn't be anything left [out]. It should be clear. Ideally it'll be simple," says Edmund F. Murphy, a managing director and head of defined contribution at Putnam Investments. He cautions, however, that while transparency is the goal, the way costs are displayed should be watched carefully. Simply showing workers a dollar amount of what their 401(k) costs each year, given the variety of investment expenses that can exist in an individual 401(k) plan, could leave some participants with misleading impressions of what they're getting for their money. "It's important that the fees are expressed in such a way that they understand the services being provided so they understand the value they're getting for the fees that they're paying," he says.

In addition to those new rules, start-ups are taking a look at obscure fee data and building better ways to dig into individual plans. BrightScope, a San Diego-based company, is tracking and rating thousands of individual 401(k) plans. On the fee side, for plan sponsors, BrightScope uses audit reports to recreate portfolios in addition to those disclosed in government filings. It also offers free fee reports for some individual plans. One downside: BrightScope's data remains a bit outdated. Much of its current data is from 2007, although new disclosure requirements mean more current information is coming on line now and will be updated more frequently.

Still, there will be a few corners of the 401(k) world that will remain cloudy. Trading costs, for example, will still be nearly impossible to discern even though they can add substantially to the cost of owning a mutual fund if managers buy and sell frequently. This is less of a 401(k) issue than an issue with mutual funds in general, but it's an another argument for trading-fee free index funds. Mike Alfred, one of BrightScope's co-founders, says trading costs can add an average 40 basis points on average—above and beyond the expense ratio—across 401(k) plans he's surveyed. In small funds that trade frequently, he says trading costs can double overall costs. Company stock ownership in a 401(k) can come with additional broker fees as well.

More broadly, 401(k) plan size and the size of your company also matters when it comes to fees, and generally bigger is better. Smaller plans can be more costly since they lack the economies of scale when it comes to fixed costs like bookkeeping that larger plans can spread around to a wider pool of assets. Also, larger companies often pick up a bigger chunk operating expenses for their employees 401(k)'s. Alfred says he's uncovered small plans where 401(k) fees ran as high as 7-8 percent.

Broadly, the rule of thumb for plan expenses is this: If you're paying more than 1 percent on your investment, you're probably paying too much. If the government's transparency measures pass, investors will have a vastly improved range of tools to accurately calculate that number.