That's not surprising since sponsors are not the ones that pay the bulk of costs; employees in the plan pay–either directly or, more commonly, by money charged against the asset pool. And even though these costs are not easy to ascertain from statements or other written material, a savvy sponsor realizes that poor returns–particularly returns made lower than those of the overall market because of fees–make for unhappy employees.

Excessive fees–even though on a quarterly basis they may appear minimal–also can delay retirement for workers because of the cumulative bite they take out of savings. For instance, the Securities and Exchange Commission estimates that a 1% annual fee on an investment held for 20 years will reduce the final account balance by 18%. With the SEC and other regulators bearing down on the mutual fund industry, lawyers and investment consultants say that plan sponsors should make it a priority to understand all the costs of their 401(k) plan and then monitor them closely, lest they find themselves in the sights of regulators or even the plaintiffs' class action bar.

Unfortunately, this is easier said than done. Experts say there's no comprehensive data on 401(k) participant costs to use as a point of reference, and the research that is available only suggests that sponsors have a potential problem. For instance, studies show that some 45% of 401(k) assets are in retail mutual funds, many of which carry the highest fees. A survey done in 2003 by the Consumer Federation of America and Fund Democracy used The Vanguard Group's pricing as a benchmark and found 57 S&P 500 index funds that charged more than Vanguard's. The other funds charged on average 82 basis points, or 4.5 times Vanguard's expense ratio of 18 basis points. The study also found 20 of the fund companies charged more than 1.20% for the same type of S&P 500 fund. The reason for the paucity of information is simple: The pricing formulas for the industry are complicated and tend to be structured differently by each plan provider.

After you clear away the jargon, the bottom line on 401(k) fees is this: Most are simply charged against plan assets and ultimately come out of the participants' piggy banks. However, they do not show up on participants' quarterly statements, so in most cases they are invisible. The biggest chunk of these costs–70% to 90% of the total–are investment management fees, which are paid to the fund company. The next big chunk, administrative fees, includes expenses such as the costs of record keeping, reporting, a Web site or call center and education. Then there are sub-transfer agent fees and 12b-1 fees–an incentive that was given to fund companies when mutual funds were young to finance the marketing of the concept. Since the idea has clearly caught on, revenues from 12b-1 fees now often go to brokers, consultants and other industry vendors with their fingers in the pie, in a practice known as revenue sharing. "Revenue sharing in and of itself is not bad," says Bruce Ashton, a lawyer and president of the American Society of Pension Actuaries. "The problem is the lack of transparency."

The SEC agrees, and in the wake of the mutual fund trading scandal, the commission has turned its attention to fees, which are not exactly hidden but are certainly not publicized or even fully explained.This is a boon for 401(k) participants and sponsors searching for real costs. "Often with a bundled environment, sponsors are told [a 401(k) plan] is free. But we know it's not free. The costs are coming out of plan assets," says Pam Hess, a defined contribution consultant at Hewitt & Associates. "How can you manage your plan expenses if you don't know what they are?"

In February, the SEC enacted new rules that require fund companies to disclose investment management fees not only as a percentage of assets, but also as a cost per $10,000 of assets. Even so, the charges still won't show up in the quarterly statements. More may be done; the SEC has begun to review the concept of 12b-1 fees to ask–given the maturity of the product and industry supporting it–whether they are still necessary.

The extent to which companies understand fees often depends on the quality of the advice they get, according to Fred Barstein of 401kExchange. Problems occur when companies, mostly small ones, set up 401(k) plans through investment advisers who don't do much 401(k) business and have little knowledge of what is required, he says. Ward Harris, managing director of The McHenry Consulting Group in Emeryville, Calif., which advises companies on retirement plans, also distinguishes between the experiences of plans of different sizes: "Most large plans are getting a pretty good deal and most small plans are not getting a very good deal. The ones in the middle are a mix of both."

The complicated pricing makes it hard to answer the most fundamental question facing a sponsor: How much should 401(k) plans cost? Beyond complex pricing structures, consultants also contend that it's hard to provide guidelines because each company's circumstances vary widely. Big plans enjoy economies of scale. Other factors that come into play include the percentage of company employees who participate, the company's turnover rate and the employees' average balance.

Michael Weddell, a retirement consultant in the Detroit office of human resources consulting firm Watson Wyatt, suggests a rough rule of thumb: All costs–including investment and administrative expenses–for a plan with 1,000 participants and $40 million of assets should total about 1% of plan assets per year. Plans that are larger should pay less and those that are smaller will pay more, Weddell says.

Consultants say that companies should remember that as plan assets grow, so too will the revenues for the provider. Why not go back to your provider on a regular basis to renegotiate? Weddell argues that plan sponsors usually do a good job of making sure fees are competitive when they're switching record keepers. "The place where there's room for improvement is revisiting that more regularly," he says.

One way to save is to use institutional funds, which are generally much cheaper than retail mutual funds, even though they're often run by the same managers. Hewitt data shows the average cost for institutional balanced funds is 50 basis points, versus an average 1.45% for a retail balanced fund. Of course, this option isn't available to small 401(k) plans; Hewitt's Hess estimates that a plan has to have $30 million to $50 million in a single asset class to qualify for an institutional fund.

Better Have a Good Reason

So, what's in it for sponsors to shop around for the best price, since almost none of the money is theirs to save? Avoiding trouble with the Department of Labor could be one incentive, retirement experts contend. While the Employee Retirement Income Security Act (ERISA), which governs retirement plans, doesn't require plan sponsors to find the lowest rate possible, their choices need to be justifiable. "If [a fiduciary] makes a decision to go with more expensive alternatives, it should be able to articulate the value added," says Don Trone, president of the Foundation for Fiduciary Studies in Sewickley, Pa. For example, a company might decide that although other funds are a little cheaper, it will go with a fund with a well-known brand name because many of its employees feel more comfortable being in that kind of fund. The sponsor should be sure to note its reasoning for choosing the more expensive fund in the plan minutes, Trone says.

Is there a big risk that excessive 401(k) costs could lead to trouble for a plan sponsor? That point is up for debate. Sherwin Kaplan, who worked for 23 years for the Labor Department and is now of counsel to the law firm of Thelen Reid & Priest LLP, says that 401(k) costs could become the next focus for retirement plan class action lawsuits, given the harsh light that is currently shining on mutual fund companies and the potential failure of sponsors in their fiduciary role. And in this case, ignorance won't be a defense. "For an ERISA plan fiduciary to say, 'I don't know what I'm being charged' is an admission," Kaplan says. "I think there's a lot of vulnerability there, and a lot of opportunity for plaintiff class action lawyers."

Not all attorneys agree. Michael Lieder, a member partner in Washington-based Sprenger & Lang and lead attorney on a 401(k) class action against First Union charging fiduciary violations, says that to be successful, plaintiffs probably have to establish sponsor self-interest–for instance, hiring a bank in its credit group as a provider even though it charges more.

But the controversy on costs has definitely made it onto the radar screen at Labor, points out Bob Altman of the American Society of Pension Actuaries, who's a partner in the Los Angeles law firm of Reish Luftman Reicher & Cohen. So it certainly doesn't hurt to err on the side of vigilance.