But just try to figure out how those costs break down. Several weeks ago, I talked about the biggest cost, the underlying expenses of the mutual funds in your plan. You can keep those low by begging your employer for more low-cost index funds, which have the added benefit of outperforming most actively managed funds over the long haul.

But there are also various administrative fees that come with a workplace retirement plan, and you usually pay for those, too. It is the rare employer, however, that breaks out those costs for you.

Instead, the costs are embedded in the expenses of many of the mutual funds you pick. In a practice known as revenue sharing, fund companies refund some of the expenses to the service provider running your plan to pay for its administrative costs.

This all seems very tidy at first glance, since neither the employer nor the employee has to write a check each year to pay for running the retirement plan. But the system tends to disproportionately punish both big savers and people investing in actively managed mutual funds, since people with higher balances and higher expense ratios on their investments end up subsidizing their fellow workers.

At long last, the Labor Department, which oversees 401(k) plans, is forcing everyone involved to confront the hard numbers. Starting next year, it is making investment companies itemize all of the various expenses employers are paying and make the underlying mutual fund costs distinct from administrative ones.

Workers, meanwhile, will get account statements that make their mutual fund fees clearer and will at least learn that revenue sharing is going on.

The Labor Department claims to have no strong feelings on the appropriateness of revenue sharing. “I’m not sure we have any opinion on this,” said Phyllis C. Borzi, the assistant secretary of labor who oversees the department’s Employee Benefits Security Administration. “We surely don’t have one right now. Whether over the long term we might have one is not clear.”

But it is pretty clear that the department hopes the new disclosure rules will lead to some good old-fashioned consciousness-raising, particularly among smaller employers that often have no idea that any of this is going on behind the scenes.

“It’s so cloudy, so you can get away with a lot,” said Chad Parks, president and chief executive of the Online 401(k), which helps small companies start plans and charges employees and employers flat fees for the privilege. “It’s got to be one of the last industries where you’re paying for a service but you don’t actually have any idea how much you’re paying for it.”

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So how did the system evolve into something so opaque that it required government intervention?

When 401(k) plans first emerged in the 1980s, employers, also known as plan sponsors in the world of workplace retirement plans, generally paid the administrative costs. They often put employee contributions in the hands of outside money managers, possibly those who were already running the company’s pension plan.

Then two things changed, according to Ted Benna, who created the first 401(k) plan. First, human resources departments came under pressure to cut costs. “That was the main motivation,” he said. Second, employees started agitating for investments that they could actually look up in the newspaper every day.

The solution was to put 401(k) money in mutual funds, and the fund companies were happy to help. Many of them charged employers nothing — and put participants into the fund companies’ own mutual funds, using the profits from the funds to cover the costs of setting up and running new 401(k) plans. When employees eventually demanded a broader choice of fund families, other fund companies realized that the quickest way to get onto an employer’s 401(k) menu was to refund some money from the investment fees they already charged each fund’s investors to help the employer pay for its plan.

It all seems pretty logical, until you stop to examine the winners and losers. “There’s a bit of a Robin Hood discussion around whether a plan should charge the rich to pay for the poor,” said Steve Utkus, a principal at Vanguard, which does not pay employers and their retirement plan administrators any revenue sharing but accepts it from other fund companies when it serves as a record keeper for a company’s retirement plan.

Think about it this way: If, say, 20 basis points (each basis point is one-hundredth of a percentage point) of a retirement plan participant’s fund expenses go toward administrative costs each year, someone with a $100,000 balance contributes $200, 10 times as much as the $20 paid by someone with an identical allocation but only a $10,000 balance. That would presumably raise some eyebrows, especially if employees knew that a large plan might need only $25 or $50 a person annually to pay those administrative costs.

Article source: http://feeds.nytimes.com/click.phdo?i=257c625f2e219d918667c975ba7313b6