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10 Ways Your 401(k) Can Fail You

BOSTON (TheStreet) -- A quick way for any website or publication to grab eyeballs is to either predict the demise of 401(k) plans or lament their shortcomings.

The doom and gloom isn't entirely unwarranted. Intended as an alternative to traditional pensions, 401(k)s have offered both success and failure to investors. Some of those failings are self-inflicted by investors -- not saving enough, taking loans and hardship withdrawals. The more than $1 trillion lost to the market collapse of 2007-08, however, was an unavoidable disaster, especially for those nearing retirement.

We took a look at some of the ways 401(k)s, by design -- though not necessarily intent -- can fail you:

1. Fees

A quality retirement plan doesn't come cheap. There are administration, compliance, recordkeeping and other costs to pay for -- not to mention the fees all those mutual funds entail.

In some cases, you may get what you pay for. A top-performing, actively managed fund may be worth every extra basis point. The problem is that the average 401(k) participant has no point of reference for these extra costs. To make a comparison, someone who knows nothing about automobiles might never know $15 is far too much to pay for a spark plug.

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Throughout the year, new federal regulations will provide participants with detailed information on what these fees are and what they are used for, but it will take time for many to grasp which fees are reasonable. Many, unfortunately, may not even try to evaluate these added costs, just as they have never dug into their Form 5500 in the past.

That's a shame, because your savings can take a severe hit. An employee with 35 years until retirement and a 401(k) account balance of $25,000 is offered by the Department of Labor as an example. If returns on investments average 7% and fees and expenses reduce average returns by 0.5%, the account balance will grow to $227,000 at retirement, even with no further contributions. If fees and expenses are 1.5%, the balance will grow to only $163,000, a 28% drop.

2. Limited offerings

In years past, "the more the merrier" was the approach taken to investment options in a 401(k) plan. It wouldn't be uncommon to have 30 to 40 funds to choose from.

Today, "less is more" is the strategy, with a smaller, less confusing array of investment options to choose from and target date funds intended as a no-fuss way to get started.

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The problem is that your workplace plan may not keep pace as you get more financially savvy. Major asset classes may be represented, and you likely have small-cap, large-cap, stable value and money market funds to choose from. But if your strategy calls for midcap equities, TIPS, commodities, emerging markets or REITs, you may find the rather generic menu options unsatisfactory.