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Retirement puzzle: Find out what your 401K costs, and how to make it work for you

For many workers, saving for retirement is a priority. The rule of thumb is to start saving early so the money has a long period of time to grow.

According to the Investment Company Institute, 401(k) plans have become the most common defined contribution plan and hold a whopping $4.7 trillion in assets.

But those plans don't come free, and finding out how much they cost can be a difficult task.

The spotlight on 401(k) fees comes after a recent spate of lawsuits against companies like Boeing, Lockheed Martin and Edison International, where employees claimed excessive fees and poor management of retirement plans.

That said, the threat of litigation may be driving down costs. According to BrightScope, a website that rates 401(k) plans, the average plan participant paid a total cost of 0.89 percent of assets in 2013, down from 1.02 percent in 2009 on a plan-weighted basis.

So how can you find out how much your plan is costing?

The widely used 401(k) plans "are the dirty little secret of financial services," Stacy Francis of wealth management firm Francis Financial told CNBC's "On the Money" in an interview.

"They're quite complicated and truly understanding the plan administrative fees is difficult because often they're buried," she explained. "And there's millions of dollars that are being made by companies without the average plan participate knowing."

Francis added that "the first thing you can do is get your plan benefit book."

Retirement account
c-George | Getty Images

A company's HR representative can provide this for you, and Francis said the booklet will tell you all the different fees associated for the plan, as well as the fees for the funds within the plan.

One of the costs to look at is the expense ratio, which is a measure of what it costs an investment company to operate a mutual fund. The expense ratio includes 12b-1 fees (or marketing costs), management and administrative fees, operating costs, and all other asset-based costs incurred by the fund, such as custodial services and taxes. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio.


Francis recommends expense ratios that are less than 1 percent. While the increase to 1.5 or 2 percent may sound small, it adds up over time.

For example, if an employee has $25,000 dollars in her retirement plan, with an annualized average return of 7 percent, and fees of 0.5 percent, her balance will grow to $227,000 in 35 years. The balance falls 28 percent to $163,000 if the fees are 1.5 percent.

Keep in mind that expense ratios don't include load costs and redemption fees.


"For most investors a really nice index fund is all you need and it also has a lot lower fees" Francis said.

An index fund is a type of mutual fund with a portfolio to match or track a market index.

One of the most famous indexes is the S&P 500 Index. Francis added that "it's a great way to get exposure to large good quality stocks and giving you a good jumpstart on your retirement."

But if you have a lousy 401(k) plan, what are your options? If you're unhappy with the plan, Francis said to reach out to the company and let them know it's not acceptable.

She also recommended contributing to the plan at least until the company's match, because that's "free money." After that, there are several options.

If you are married, look into your spouse's 401(k) plan and put more money towards their plan to reach the family's goal. Also people can look into opening up an IRA, which allows contributions up to $5,500 dollars in 2016 if you are under 50 years old, and up to $6,500 if you are over that threshold.


On the Money airs on CNBC Saturdays at 5:30 am ET, or check listings for air times in local markets.