Stop Your 401(K) From Robbing Your Savings

It's one thing to lose money in your retirement account because of stock market fluctuations. It's quite another for your savings to be decimated by administrative fees.

Not that we expect a free pass on all account services rendered. But at least we want to know how much we're paying and for what. Good luck finding that out if your money's in an employer-sponsored retirement plan, though, such as a 401(k) (and its 403(b) and 457 versions).

Tucked away in your 401(k) plan's fine print, under headings like "Summary Annual Report" or "Summary Plan Description" or "Fee Arrangement," are the true costs of investing your money in your employer-sponsored plan.

Add those plan costs to the mutual fund fees you're paying on the investments within the plan, and in the irony of all ironies, even if your 401(k) returns are flat, you're still going to lose money on your investment.

Is Your Retirement Plan Picking Your Pocket?

Given that 401(k)s are the primary retirement savings vehicles for the average American -- where the bulk of most of our long-term savings reside -- it's critical to know if you're over-paying on your account.

There are expenses, and there are other expenses. What's the difference? The fees that are readily disclosed to plan participants are those related to the investments. Those expenses are plainly spelled out on your account statement or plan website, typically reflected as a fund's expense ratio.

It's clear that employers that are struggling to make ends meet aren't making your retirement a priority. A few years back, companies like IBM, Verizon, and Hewlett-Packard started freezing traditional pension programs for employees. More recently, a number of large employers, including General Motors, FedEx, and Sears Holdings, have suspended employer matching contributions on 401(k)s.

Costs associated with the administrative upkeep of your plan -- those "other" expenses -- are not required to be broadcast to you and your co-workers thanks to a disclosure on your statement that goes something like this: "All returns reflect investment expenses but not plan expenses." In other words, "We're taking money out of your account regularly to pay for the administrative costs of this plan. Have a nice day."

The 5-Figure 401(k) Service Fee

In Stop the 401(k) Rip-Off, author David Loeper tells his own tale of getting ripped off by his (former) company-sponsored retirement plan. Looking in the plan's Summary Annual Report, under the "Basic Financial Statement" section, Loeper discovered $11,304 in additional expenses.

Dividing that amount by the total value of plan assets ($1,341,870), he calculated that his plan has an additional 0.84% in fees. After adding that to the expense ratios of his funds, he discovered that he was paying 1.30% a year to be mostly in index-based investments.

Even on a $20,000 401(k) balance, that extra 0.84% means paying $168 extra in fees in one year. Over time, that can cost even more, because every dollar that is pulled out to cover investment fees robs you of the chance to reinvest it and watch it compound over time.

Fee Swatting

If you have money sitting in a former employer's 401(k) plan, the fix for fee decimation is simple: Move your money to a rollover IRA and stop paying your ex-co-workers' retirement plan fees.

Rolling your money over is simple: Contact the institution that will receive your assets (a low-cost discount brokerage is your best bet), contact the institution that will transfer your assets, fill out the transfer paperwork, and relax while until the money is moved from one account into the other.

Once your money is moved, you can continue to invest in mutual funds (perhaps the same ones you had in the plan, or you can find better ones), or buy stocks, bonds, or ETFs directly.

If you're paying high fees in your current plan, you have several options:

• Choose index funds instead of actively managed mutual funds: If your plan offers index mutual funds, they usually (but not always -- so check!) have lower expense ratios. Vanguard's 500 Index Fund or an index ETF like SPDR Trust (AMEX: SPY) both offer low fees. If your actively managed choices haven't been trouncing the indexes, then you're doubly better off moving your money into an index.
• Buy stocks instead of funds: Some plans offer a "brokerage window" that allows participants to buy stocks instead of mutual funds, thus avoiding at least the fund expense fees. Look into the brokerage's pricing, since this may be a more cost-effective way to invest.
• Roll the money into an IRA early: Some plans allow for "in-service distributions" which allow employees to roll their vested balance into an IRA while still working at the company. Again, moving it into the IRA (so you do not trigger early withdrawal fees or taxes) could save you money.
• Convince your boss that you need a better plan: Compose a "Dear Boss: Fix Our 401(k)" letter (see the related links for a cheat sheet) to point out any excessive fees, ones your human resources department or benefits committee likely doesn't even realize your company is paying. Click that link for a step-by-step game plan on getting better choices for you and your co-workers.

Fool.com writer Dayana Yochim was dazzled by the Fool 401(k) plan's head-to-toe makeover. She now hearts her 401(k).