For a U.S. stock fund, look for an expense ratio of .70 percent or less, and for an international stock fund 1 percent or less. With a domestic bond fund, my ideal would be under .50 percent. But my ideal and your particular 401(k) may be in conflict.
Second, do a little math. Multiply a fund's expense ratio by the amount you have invested in that fund. That tells you how much you're paying over the course of a year for that particular fund. Then compare that amount to the cost of a similar fund in your 401(k) lineup.
On a $50,000 investment, what's the difference between a fund with a 1.5 percent expense ratio and one with a .50 percent expense ratio? It's a $500 difference — each and every year.
Spread out over 20 years, an after expenses return of 7 percent a year, versus 6 percent for the higher cost fund, could mean an extra $33,000 available at retirement.
Third, try to pick out the best fund available to you in various asset classes. Break down your 401(k) lineup by major asset categories and then try to find the best choice within each category you want represented in your retirement portfolio. Sound investment practice requires you to hold mutual funds representing a variety of asset classes, including U.S. small and large cap stocks, international stocks, bonds and maybe even a little bit each in real estate and emerging markets funds.
In many cases, you may only have one choice. But if you have more than one option, this is where costs can be a critical deciding factor.
Finally, ask for better alternatives.
Under federal law, retirement plan sponsors — the company you work for — have a fiduciary responsibility to look out for your best interests in that retirement plan. That means enough complaints about current 401(k) offerings could mean they will be persuaded to seek out better options.
A verbal tirade in front of the human resources director may not be the best idea. But a polite letter to those responsible for crafting your 401(k) plan — and by law responsible to you — is a smart option.
Try it. Your retirement security could depend upon it.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. Before establishing the firm, he worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, which is dedicated to providing financial planning and advice to clients on an hourly, as-needed basis. Contact David at firstname.lastname@example.org