Many 401(k)s, particularly those sold by insurance companies are loaded with hidden fees. A recent study by PAi and Sharebuilder found that the average 401(k) had annual fees to participants of over 1.67% (Study as of December 2006). However, fees for plans sold by insurance companies were easily over 2.00% per year when sub account fees were factored in.

2.00% per year in fees is huge. Let me illustrate:

Let’s say you place $50,000 in a 401(k) with fees of 2.00% per year and in a 401(k) with fees of 1.00% per year. The key here is we are talking about the same investment. The only difference is the fees. Assuming an 8% rate of return before fees and a 25-year holding period, the plan with 2% total fees has a balance of $214,593.54. The plan with fees of 1.00% had a balance of $271,371.63. That’s a difference of over $56,778 just by eliminating the hidden fees associated with many plans.

The list of potential extra charges can be overwhelming: 12b-1 fees, sales loads and wrap fees, transaction fees, rebalancing fees, sub-transfer agent (sub-TA) fees, soft dollars, and fund turnover expenses, just to name a few. Don’t let the names confuse you — the total cost applied against your contributions is all that matters!