1. Add fund expenses charged to your 401(k)
These charges, which go to the companies that manage your plan investments, are typically the largest 401(k) fees you pay.
To estimate your direct investment expenses, look for the expense ratio for each fund you own. That figure may be listed on your 401(k) plan Web site. Expense ratios are expressed as an annual percentage of your total investments.
Next, grab your most recent 401(k) statement and record the expense ratio next to the balance in each fund you own. Multiply the expense ratio by your ending balance to determine the cost of each fund. For example, if you have $10,000 in a fund with an expense ratio of 0.55%, you are paying $55 a year. Add up the expenses for all of your funds.
A total expense ratio of 1% or less is reasonable. When we calculated someone's fees with another company, they totaled roughly $4,000, or about 1% of there 401(k) balance.
If your 401(k) plan uses a broker or investment consultant, as many smaller plans do, you may be charged an additional 2% or more in portfolio-management fees.
Teachers and other employees of nonprofit organizations who save for retirement through 403(b) plans may pay additional mortality charges and expenses to insurance companies, which typically provide annuities as investment options.
2. Determine if plan operating expenses are passed on to your 401(k)
You may also be paying your share of what it costs your employer to operate the 401(k) plan. Bigger companies often pick up plan expenses on behalf of their employees, but smaller employers can't always afford to do that.
Still, for most 401(k) participants, the fees are less than they'd pay investing on their own, says David Wray, president of the Profit Sharing/401(k) Council of America.
Get a copy of your plan's summary annual report from your benefits office. Under the section labeled "basic financial statement," look for total plan expenses and subtract the amount of benefits paid. The difference is the plan's net administrative expenses.
Next compute your cost for administrative expenses, divide the net expenses (for instance, $12,000) by the total value of the plan (let's say $1.5 million). Multiply that percentage -- which is 0.8% (.008) in this example -- by your total account balance. That will give you your share of total plan expenses that are deducted from your account before your individual balance is calculated.
3. Investigate undisclosed or hidden costs
You could be funding your boss's retirement or that of a colleague in the next cubicle without realizing it. That's what happens when your plan's service provider and individual mutual fund companies engage in "revenue sharing" arrangements. Such agreements are seldom disclosed; even your employer is unlikely to be aware of them.
For example, some high-cost funds may offer a rebate to the service provider to defray overall operating expenses. So the excess fees that you pay for your fund are used to pay the costs for everyone else in the plan. Or your plan's provider may receive commissions from mutual fund companies to steer participants into higher-cost funds.
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