If your 401(k) is invested in this type of fund, you could lose thousands in retirement savings

Do you really know how your 401(k) plan is invested? If not, you may be putting your money into more expensive mutual funds and not even know it, new research suggests.

The researchers analyzed the 1,000 largest 401(k) plans between 2009 and 2013, the only years in which the Labor Department required detailed public disclosure of how plan administrators are paid. They found that many plans include investment options that share revenues with administrators, creating incentives that can work against the best interests of savers.

“It’s a big problem if employees don’t understand the costs of their investment choices,” said Clemens Sialm, a finance professor at the University of Texas at Austin and one of the study’s authors. “The result is that you may pay more than you realize for weaker returns.”

What the researchers found

The researchers found that the average 401(k) plan offered about 22 different investment options to the typical participant, with these financing options coming from seven different companies on average. About 40% of the investments available were affiliated with the 401(k) provider, or “record keeper,” and the remaining 60% of the funds were from third parties.

About half of the plans (54%) had at least one revenue-sharing mutual fund option with the plan registrar, while funds that shared revenue were approximately 60% more likely than non-revenue-sharing funds to be added to the list of selected plan options. They were also less likely to be removed after they were added.

In short, researchers found that 401(k) plan managers are more likely to choose funds that pay them more than just traditional fees. While this is not surprising, funds that shared revenues often failed to offset those high hidden costs with lower upfront fees, and did not provide better-than-average returns to offset the revenue-sharing component of their funds, the study found.

This means that without knowing it, you may be investing your money in a fund that offers lower returns than you would have otherwise.

How can this be fixed?

Sialm said it was “not very helpful” for companies to disclose plan terms within long policy documents, as employees are unlikely to read them. Instead, he said employers should explain these 401(k) options. Upfront and in clear language. He added that employees should push for more transparency.

He also recommended that employers pay the companies that manage their 401(k) plans their administrative costs directly, which may make it less likely that record keepers will choose funds that share revenue with them.