In a 401(k) plan, your account balance will determine the amount of retirement income you will receive. Regardless of your position in the company, if you are a plan participant, these fees will have an impact - so it's essential to have a clear understanding of what you are truly paying for with your retirement dollars.

The information below helps define what are the most common retirement plan fees and is intended to encourage you, both as a 401(k) plan participant and plan sponsor, to:

• Gain a clear understanding of fees and hidden costs

• Compare all services received with the total cost

• Recognize that "free" is not really free

401(k) Plan Costs

There are several different types of fees that may apply to your plan, but they generally fall into two main categories: plan administration costs and investment expenses.

Plan Administration Costs

The everyday operation of a 401(k) plan involves fees for basic administrative services that are necessary for servicing the plan, including, but not limited to, producing statements, providing a toll-free number and Web site, compliance testing, Form 5500 preparation and contribution processing. A recordkeeper can charge for these services in several different ways, but the most common include:

• Per-participant recordkeeping fee: A dollar amount charged for each plan participant.

• Asset-based fee: A fee charged as a percentage based on the assets in the plan.

• Fixed per-plan fee: A flat dollar fee charged to the plan.

Investment Expenses

Typically, the largest component of 401(k) plan fees are attributable to the investment management fees charged by mutual funds. These costs are usually displayed as an indirect charge on your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted.

The following are primary types of investment expenses:

Management Fees

These are ongoing charges for managing the assets of the mutual fund. They are generally stated as a percentage of assets invested in the fund. Management fees are paid out of the mutual fund assets to the fund's investment adviser (or their affiliates) for managing the fund's investment portfolio. Management fees may also be used to cover certain administrative fees paid to the investment adviser and can vary widely, depending on the investment adviser and the nature of the investment portfolio. All mutual fund investment options will have a management fee.

Distribution and/or Service Fees

Distribution fees include fees paid for marketing and selling fund shares, such as compensating brokers for selling the fund's shares, paying for advertising, printing and mailing of prospectuses to new investors and the printing and mailing of sales literature. The most common type is 12b-1 fees, which are generally between 0.25 - 0.75 percent of a fund's average net assets (the maximum allowed for marketing and distribution expenses pursuant to applicable FINRA [Financial Industry Regulatory Authority] rules). Information on the 12b-1 fee is disclosed in a fund's prospectus.

Furthermore, sub-TA (sub-Transfer Agency) or shareholder servicing fees can be paid by the fund company to a recordkeeper for providing all the sub-accounting functions at the participant level, where there is only one account established at the fund company. In contrast to a management fee, not all mutual funds contain distribution and/or shareholder service fees; those that do will usually have higher overall expense ratios.

Over 94 percent of a 401(k) plan's cost is attributable to investment expenses.

Other Mutual Fund Fees

Other fees charged by a mutual fund include custodial, legal, accounting, transfer agent and other administrative expenses.

Variable Annuity Fees

In addition to the types of fees previously described, an insurance company may offer products through a group annuity policy that essentially adds a variable annuity insurance fee known as a "wrapper" to the underlying mutual funds, resulting in an added cost. A variable annuity is a hybrid investment/insurance product that adds a mortality and expense fee that is charged on top of underlying mutual funds. As a result, it can be very costly to include variable annuities as part of your 401(k) plan.

Long Term Impact to Participants

What matters most is the impact these fees can have on plan participant accounts. Over the long term, even a small difference in fees can translate into a big difference in a retirement account balance. As a plan fiduciary, plan sponsors (those sponsoring your retirement plan) must act solely in the interest of participants and their beneficiaries with the exclusive purpose of providing benefits to them. Therefore, it is imperative that plan sponsors understand all fees that are being charged to plan participants.

When a plan is marketed as "free," it is likely that there are hidden investment costs that could potentially lower the retirement nest egg of participants.