401(k) plans can be extremely useful tools to help you save for retirement. Lately, though, they've come under fire because of their high and often hard-to-figure-out fees and their limited investment options, which turn what should be a smart savings vehicle into one that robs employees of their investment returns.
Workers have tended to blame their employers for giving them bad investments at high costs. But a recent study from the Government Accountability Office found that when it comes to understanding the nuts and bolts of the retirement plans they offer, the bosses are just as much in the dark as workers are.
That's alarming, particularly considering that the companies that sponsor plans have a duty to their workers to look after their interests.
It's All Greek to, Well, Everyone
The GAO study found that employers have the same problems ferreting out esoteric fees that workers face.
For instance, revenue-sharing arrangements under which mutual fund companies collect fees from fund shareholders and then divert some of the fee income to plan service providers can boost the total fees that 401(k) participants pay. Moreover, because these fees are usually charged on a percentage basis, they get larger as workers save more -- even though the services provided typically remain the same.
The study referred to one employer that actually paid record-keeping fees that were 16 times greater than it believed it was paying, because it didn't understand its revenue-sharing arrangement with its services provider. In addition, some investment options, such as variable annuities and other insurance products, come with additional expenses that add to the fee burden.
Moreover, the smaller the employer, the more likely it is you'll pay higher fees.
The GAO cited figures from BrightScope saying that plans with less than $10 million in assets pay 1.9% annually for 401(k)-related services, compared to just 1.08% for plans with more than $100 million. So if you work for a tiny company, you can expect your 401(k) choices to be more expensive.
Who Really Pays the Tab
Unfortunately, the main reason employers don't know about the fees their plans incur is that they tend not to pay them. Not only do workers pay fund management costs from their investments, but service providers often take record-keeping and administrative fees directly from plan assets as well.
%Gallery-109785%In response to the GAO report, the Department of Labor is trying to educate employers about their responsibilities in providing retirement plans. In the end, though, it's up to you to make sure your employer's 401(k) plan makes sense for you. If the fees are too high, either ask for a change or choose other methods, such as IRAs, to save for retirement.
Motley Fool contributor Dan Caplinger has no one to blame but himself for his self-directed 401(k). You can follow him on Twitter here.