How to tell if your 401(k) is a dud

There's a lot to like about employer-sponsored retirement plans such as the 401(k).

They're convenient (funded by automatic payroll deduction) and offer tax savings (contributions lower a participant's taxable income, and investments grow tax-free), and many companies sweeten the deal by pitching in their own money to encourage employees to save.

But even this most valuable of company perks can be ruined by high retirement-plan fees and crummy investment choices.

It's these factors that have more and more employees crying foul and filing lawsuits - more than a dozen in the last year, Bloomberg Bureau of National Affairs reported - against their bosses for the equivalent of 401(k) malpractice.

These worker uprisings are a good rallying cry to take a closer look at your plan.

The quality of a 401(k) comes down to the breadth of investment options, the management fees charged on those investments, and the plan's administrative costs.

Unfortunately, if you work at a small company, the terms in your plan may not be the best. A 2013 defined contribution/401(k) fee study by Deloitte on behalf of the Investment Company Institute found that all-in fees (including administrative, recordkeeping, and investment fees) at small companies are nearly four times higher than those for larger companies.

Companies with $1 million to less than $10 million in plan assets pay a median 1.27 percent compared with 0.37 percent for those with $500 million or more. In other words, $12.70, versus $3.70, of every $1,000 a worker invests is lost to 401(k) fees.

An employee's 401(k) fee mileage depends on the investments chosen, as well as fees the employee can and cannot control. Three key questions to ask when evaluating accounts:

How plentiful are the investment options? According to research from the Investment Company Institute and BrightScope, the average 401(k) offers 25 investment choices. That's more than enough as long as the menu of funds includes all the ingredients necessary to build a well-balanced retirement portfolio - a diversified mix of stocks, bonds, and cash - at a reasonable price.

The best 401(k) plans offer an array of low-cost mutual funds that let investors cover as many bases as possible. Even then, some savers may find the choices too limited. In that case, an individual retirement account can be used to fill in the gaps.

What's the markup on the mutual funds? A plan offering plenty of funds, but only of the high-priced variety, is no better than a plan with limited offerings. A good rule of thumb is to steer clear of any fund with an expense ratio of 1 percent or more. And although index mutual funds are known for their low fees, beware of expense-ratio markups there, too.

Go directly to the source for this information, through your plan's 401(k) prospectus or the administrator's website. The expense ratio on a fund purchased in a 401(k) may be different from what is posted on a fund company's website.

Who pays for housekeeping duties? Most companies outsource the logistical care and maintenance of administering a 401(k). And who picks up the tab? It might be you.

Fee-arrangement details are disclosed in the 401(k) summary plan description or annual report. The most generous companies pay the entire bill. Others cover only a portion. The mark of a subpar plan is one asking workers to foot the whole bill.

Even the worst high-fee, low-choice 401(k) is worthwhile, at least up to a point, if it includes an employer match. Never leave the money on the table.

For workers stuck with a plan lacking even that silver (dollar) lining:

Direct your initial retirement savings dollars into a self-directed IRA and max it out before turning to the 401(k).

Look for an investing escape hatch. Some 401(k)s include a brokerage window - the option to open a self-directed account within the plan - which opens up the world of outside investment choices such as bonds, certificates of deposit, exchange-traded funds, other mutual funds, and individual stocks.

Get out early through an in-service distribution. This works like an IRA rollover by allowing a current employee to move money from the 401(k) into a personal IRA without incurring early-withdrawal penalties and taxes. Not all plans allow it; often, certain criteria must be met, such as being age 59½ or older.

Put on your activist cap and lobby for improved conditions for everyone. Push to include lower-fee investment options in the plan.

NerdWallet.com provided this column to the Associated Press.