Total 401(k) fees for employees range from less than 1% to more than 2% of assets. The typical fees--between 1% and 1.5% of assets--can result in a 24% to 38% reduction in overall savings at the end of a 40-year career, assuming steady contributions and adjusting for market fluctuations. To compensate for this loss, employees would have to extend their careers another two-and-a-half to four years.

Employees enrolled in 401(k)s pay fees for plan administration and legal compliance--in addition to the costs of asset management. Plus, fees vary with plan size. In estimates by the Congressional Budget Office in 2004, plans with more than 4,000 participants and $20 million in assets were charged 0.8% of assets plus a flat fee of $24 per participant; smaller plans incurred fees of 1.0% of assets and a flat fee of $60 per participant. (In many instances, some or all of these fees are paid by the employer.)

Moreover, as the number of services offered for a 401(k) increases, so do fees. An around-the-clock customer service line, for example, may be beneficial but comes at a steep price over the long term. And actively managed funds incur larger fees than passively managed funds, due to more-frequent trades. Some 401(k) investors may want these services and be willing to pay for them, but others may not.

LOWER-COST OPTIONS

Policymakers should support the creation of a large, multi-company 401(k) plan that offers limited investment options and services. A model already exists: the Thrift Savings Plan for federal employees. TSP investment options are limited to five index funds--government bonds, bonds, small caps, domestic stocks and international stocks--and one life-cycle fund. In 2006, TSP fees were just 0.03% of assets; some of the plan's costs are subsidized by the federal government. During the Social Security debate in 2005, most experts assumed that the full cost of the TSP is about 0.3%.

Instead of recreating a TSP-style 401(k) plan in the private sector, experts have proposed that such government plans open a separate branch for private-sector employers. The plan would be administered by the state or federal government, with the funds managed by private companies, just as the TSP is managed. Proposals to offer a publicly administered, privately managed 401(k) plan have been set forth by Gov. Granholm in Michigan, by the Keystone Research Center in Pennsylvania and by the Economic Opportunity Institute in Washington, among others.

In addition, there should be better fee disclosure to allow employees to make informed choices. The Department of Labor is looking at ways to require increased disclosure and encourage the use of clearer language to explain fees, which would allow for easier comparisons of plans--important if you're considering rolling over savings into a plan at a new workplace. In the meantime, financial advisors can help participants collect and interpret the information. Of course, increased disclosure can only do so much. It doesn't negate the basic economic logic: Smaller plans tend to pay higher fees and additional services cost more.

Policymakers should act swiftly. Employees and employers should know the costs associated with saving for retirement and they should have low-cost 401(k) alternatives if they so desire. Building a retirement nest egg that includes an extra 1% of assets under management would help secure a better retirement for all 401(k) investors.

Christian E. Weller, PhD, is a senior fellow at the Center for American Progress and Shana Jenkins is a public policy student with the University of California in Los Angeles.

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