Q: My company's 401(k) plan charges high administrative fees, and the expense ratios on the investments offered are too high. How do I maximize my retirement savings?
You know those GIFs of people wildly and aggressively clapping? That's me right now.
Not because your 401(k) is lousy, but because you know it's lousy. Over half of workers don't even realize that investing in their retirement plan comes at a cost, according to nonprofit The National Association of Retirement Plan Participants. Of those who do, only a quarter understand how the fees they're paying are calculated.
So let me start by saying this: Any readers who are thinking, "Wait, what?" please get out your plan statement or call your plan administrator, and get a handle on how much you're paying in fees and expenses. You can also run your plan through a 401(k) fee calculator. I'd do both; this is that important, and I'll let the money tell you why: The less you can pay in fees, the more money you will have at retirement. This chart shows how much various fees would cost a pretty typical 401(k) investor by retirement age. It's scary stuff.
These fees come from two directions: Administrative expenses -- over which you have little control, though some kind employers will cover the cost -- and investment expense ratios. Added up, it's not unheard of for the total cost to fall toward the right side of that chart, though the typical 401(k) participant pays a median 0.67%, according to 2013 data from the Investment Company Institute, a fund trade group. I'd consider your own plan expensive if you're paying more than 1%.
There's some misconception that the mutual funds in 401(k)s are by definition expensive; in fact, their asset-weighted average expense ratios are lower than the average for all mutual funds. But that doesn't mean the plan you're in will offer enough cheap options -- there's a reason we've recently seen a string of lawsuits against 401(k) providers. A 401(k) limits you to 20 or so investment options in the plan, so you might have only one fund choice for each investment category. If the expenses on those funds are high, you can't shop for a lower-cost fund; you're stuck with those choices. Smaller plans tend to be most expensive, as the administrative costs are spread among fewer people, and they don't have the leverage to bring down fund fees.
So what to do?
Expenses aside, get the match
I don't care if you're in the most expensive 401(k) plan in the world; until those fees reach the value of your employer's matching dollars -- and they never will -- the plan is well worth that cost. It's safe to assume you'd gladly pay $1 or $2 in fees to get $50 or $100 back from your employer.
That's essentially how an employer match works: Many companies kick in 50% or 100% of every dollar you contribute, up to a limit. Sure, it hurts when you lose a portion of your contribution -- and of that employer contribution -- to fees, but I've found that free money is pretty effective at stopping the burn.
To be clear, I'm not saying you have to suck it up. If you feel like your plan's fees are grossly unfair, you should: 1) Do what you can to keep your investment fees low, by choosing low-cost investments like index funds over expensive managed options like target-date funds, and 2) raise the issue with HR. If you rally enough of your co-workers, your company might be willing to shop around for better options.
Then take your money elsewhere
In the chart above, note that the investor is contributing enough to the plan to get the match, but no more. That's by design: You can -- and in many cases, especially if you're in an expensive plan, you should -- contribute to both a 401(k) and an IRA.
The way to go: Contribute until you get the full match, then put any additional money you can save for the year into an IRA, which has a contribution limit of $5,500 in 2016 (if you're 50 or older, you get to throw in another $1,000). If your 401(k) doesn't offer a match, skip it and start with the IRA. IRA account providers frequently charge no fees (assuming you're not working with a financial advisor) and give you access to a huge pool of investments; you can easily find low-cost funds.
»MORE: How to invest your IRA
And if you're lucky -- or let's say strategic -- enough to max out that IRA for the year, and you want to save more? Your 401(k), even if a total dud, is worth revisiting at that point, for one big reason: It has an $18,000 contribution limit ($24,000 if you're 50 or older), which makes it the single best way to get a lot of tax-deferred money put away for retirement.
Finally, if you leave this job, please take the balance in that plan with you by rolling it into an IRA (or into your new employer's plan, if it's a step up from the old one).
Arielle O'Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.