At a Time of Financial Stress, 401(k) Fees Matter More Than Ever

On passive index funds, you get a much better break: The average yearly expense ratio was 0.13 percent last year. Competition is so fierce that some fund companies are charging negligible or zero expenses on select funds.

Even if you work for a small or medium-size company, you can request that it search for lower-cost providers. “There are so many small plans that have incredibly high fees,” said Michael Bird, a retirement plan adviser who works with small companies in Bend, Ore. “A 401(k) plan should be reviewed every three years” for fees, he said. “There’s always a lot of room for improvement.”

All told, doing some homework pays off. A 2015 White House study found that 401(k) fees could total tens of thousands of dollars over a lifetime of investing. That lost money could be invested to create a more robust retirement fund.

Working with your employer is an essential first step. You may, though, encounter resistance or flat-out refusal from your company to reduce expenses or change vendors. In that case, another option is to sue your company. Under the Employee Retirement Income Security Act, the federal law governing retirement plans, your employer has a fiduciary obligation to prudently find the lowest-cost plan provider.

Some disenchanted workers, upset over excessive fees, have taken their employers to court in recent years: More than 100 new 401(k) complaints were filed in 2016-17 alone, the most recent years tracked, according to a paper published in 2018 by the Center for Retirement Research at Boston College.

Although he has not updated this study with more recent data, Geoffrey T. Sanzenbacher, a professor of economics at Boston College and an author of the research, said it was possible there would be a new surge in 401(k) lawsuits, mimicking the increase after the 2008 meltdown. He said that the employee lawsuits that had the greatest degree of success were those that involved an imprudent process of fund selection or conflicts of interest.

“A lot of people aren’t aware they are paying plan fees at all,” Professor Sanzenbacher said. “The level of employee engagement is low, even though 1 percent in annual fees means a 1 percent reduction in return. Over time, that’s costly.”

Of course, suing your employer is a time-consuming and difficult journey. It can take years to get a settlement, or the lawsuit may be thrown out. It is usually far easier to work with a willing employer to vet fees and find lower-cost funds.