Since mutual funds are the most widely offered investment option in participant-directed retirement plans like 401(k)s, 403(b)s and 457 plans, the simplest way to begin is to check the Fund Expense Ratio for each of the funds offered in your plan. You can look at a fund's prospectus or to services like Morningstar, Lipper, Thompson, Standard & Poors to gather data on the fund expenses. When looking at expenses like these, keep in mind these charges are applied BEFORE a fund reports investment results or calculates its Net Asset Value (NAV).

The most basic expenses include administration, investment management and distribution fees that can range from as little as 0.08% or eight basis points, to nearly 3%, or three hundred basis points, in extreme cases* but there are several other things to look for as well:

Different Share Classes for the Same Fund
When you go looking for your fund's information you may find several varieties, or "share classes," of a single fund. Sometimes classes are designated by abbreviations ("Inv," "Adv" or "Inst"), a letter ("A," "R," "B," "C"), a numeral ("I" or "II") or both ("R1," "R2" and so forth). One fund family has 5 "R" classes in addition to "A," "B" and "C" class shares!

This is not only confusing, it can be expensive. Each share class has a unique expense structure that can vary by as much as 1.50%, or 150 basis points, between the lowest and highest cost share class! In practical terms, that means your plan's participants receive 1.50% LESS return on their investment in the same fund just because of the choice of share class. That's EXPENSIVE!! As a sponsor, and as a fiduciary, you need to make sure you're getting a level of service to justify those fees.

Re-registration or vendor specific fund classes. Some providers, most notably insurance companies, effectively create their own share class of a fund by buying shares of the fund and then "re-registering" the fund under a name of their choosing and, in the process, ADDING a layer of expenses to compensate for services such as record keeping, administration, performance monitoring. Here's how it works: The 401(k) provider decides to offer XYZ Mutual Fund to plan sponsors who use their platform. Let's say XYZ Fund has an expense ratio of 1.00%. Typically, the provider, let's call it ABC Insurance Company, will call the fund "ABC Company XYZ Mutual Fund" on their platform. It will have an expense ratio of, say, 1.50%. Same investment management, same investments, same fund; higher expense ratio. That means, if you choose this provider and this fund, your plan's participants will earn 0.50%, or 50 basis points less on their money just because of the choice of that provider. Once again, as a sponsor you have an obligation to know why that extra charge is there and what you're getting for it.

In its publication, Understanding 401(k) Fees, the Department of Labor (DOL), points out that it wants plan sponsors to know about and understand ALL of the fees being charged because, over time, even 1.00% less return can mean tens or hundreds of thousands of dollars LESS money in participant account values. As a sponsor, it's in your best interests, for many reasons, to know.