Your 401(k) Might Be Costing You Thousands

What It Covers

The Money Guy Show examines hidden fees in 401(k) plans that cost investors thousands through revenue-sharing arrangements and high expense ratios. Hosts Brian Preston and Bo Hansen explain how to identify expensive funds, advocate for better plan options, and optimize retirement savings through proper fund selection and account structure strategies.

Key Questions Answered

• •Revenue-Sharing Costs: Department of Labor research found over 50% of the thousand largest 401(k) plans contain funds with revenue-sharing arrangements where investment options pay kickbacks to plan administrators. Even index funds can carry inflated expense ratios—some Vanguard S&P 500 funds in certain plans charge over 0.50% versus the standard 0.10% or less, costing hundreds of thousands over a career.
• •Performance Impact Math: Two S&P 500 tracking funds with different fee structures demonstrate the wealth erosion from high costs. A revenue-sharing fund charging 0.67% expense ratio versus a low-cost index at 0.015% creates returns of 9.33% versus 9.985% on a 10% market return. This seemingly small difference compounds to hundreds of thousands of dollars lost over a working career.
• •Employee Advocacy Strategy: Workers can successfully improve their 401(k) plans by asking HR departments specific questions about low-cost index fund availability and safe harbor plan options. One listener improved their entire company plan by requesting changes, demonstrating that plan improvements often require just one employee to initiate the conversation with tactful, solution-focused proposals that benefit all parties.
• •Lump Sum Versus Dollar Cost Averaging: The Goldilocks rule provides clear guidance for investing windfalls based on percentage of total investable assets. Invest immediately if the amount represents under 10% of holdings, spread over four months for 10-20%, and dollar cost average over twelve months for amounts exceeding 50% to balance market participation against transaction risk.
• •Backdoor Roth Versus Roth 401(k): High earners should prioritize backdoor Roth IRA contributions over Roth 401(k) salary deferrals when in top tax brackets exceeding 37% effective rates. Traditional 401(k) contributions provide immediate 40-50% tax savings (including state taxes), while backdoor Roth conversions allow tax-free Roth funding without sacrificing current deductions, creating optimal tax arbitrage opportunities.
• •IRA Basis Recovery Strategy: Before rolling traditional IRAs into 401(k) plans to enable backdoor Roth conversions, forensically review past tax returns to identify non-deductible contributions that created basis. One couple discovered $60,000-70,000 in after-tax basis by examining eleven years of returns, allowing them to isolate and convert this amount tax-free rather than mistakenly rolling it into pretax accounts.