Is your 401(k) plan all it could be?

Although federal law requires that plan administration and investment choices be based on the interests of the plan participants, practices that offer too few fund choices and pay unnecessarily high fees and sales commissions may fall short of this goal.

I didn't realize how inadequate a 401(k) plan could be until it hit home. My wife, initially an employee-physician in an allergy practice, became a partner a few years ago. Around that time, when her income-and, consequently, her contributions-increased, I took a long hard look at her practice's 401(k) plan. I was well-versed in investments and able to point out some ways in which it was sorely lacking.

Fortunately, as a faculty physician at Indiana University, I participate in a 403(b) plan with multiple investment choices, and knew there had to be far better 401(k) options out there, so I did a lot of digging. Acting on some of these lessons could mean thousands of extra retirement dollars in your pocket.

Before you can truly understand how much extra your 401(k) plan may be costing, you need to understand how the plan is run. Typically, practices outsource their 401(k)s to plan administrators and, for the sake of convenience, opt for one-stop-shop financial advisers who handle the plan's administration and investments. All you do is arrange for electronic payroll transmission of the contributions and you receive periodic statements. If this sounds like your plan, chances are you're paying way too much.

A typical 401(k) plan involves four key parties. First, there's the employer and owner of the practice, who is usually the trustee and bears the fiduciary responsibility of making the investment choices and selecting the other key parties. But this is a group effort.

The financial adviser

Operating under different names and in a variety of capacities, the financial adviser function may be served by a bank, brokerage firm, or independent adviser. He's usually the person you deal with regularly and the one who, along with you, as trustee, determines the investment choices. In general, you can choose from approximately 15 mutual funds. However, many of the advisers offer "adviser class funds." These funds' expense ratios are relatively high, as the adviser receives a sizeable portion of the fund's 12b-1 (marketing) fee. That fee can amount to as much as 1 percent of the assets, which is often higher than fees of funds that aren't sold through advisers. Consider a 401(k) plan with total assets of $500,000 and a 12b-1 fee of 1 percent. In this case, your adviser is receiving a portion of $5,000 per year.

The third-party administrator

Next, there's the record-keeper, a company usually outsourced by your adviser. These third-party administrators help design the plan document and make sure it meets federal legal requirements. The cost of this service is either billed to you separately or taken directly out of the plan's assets. These companies also provide a website where advisers and plan participants can log in to change investment options and tweak asset allocations, respectively.