From moneychimp we have an estimate of the real rate of return of the stock market:
Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.
So if the 401(k) has administrative costs in the 1-2% range and forces you to invest in mutual funds (a realistic option) which also have a 1-2% range before administrative costs then it is perfectly plausible that 50% of the returns are eaten up in administration costs. Now if the plan allowed a client to invest directly inin TIPS then real rates of return are in the 4.25% range (call it 4% after Vanguard levels of administrative costs).
But TIPS are debts owed by the US Treasury. Do you know what else has been lending money to the US government and has extremely low administrative costs (at least compared to these)? Social Security. Sure, the government could default on it but they could also default on treasury bonds, too.
The worst part of all of this is that, insofar as administrative costs are invisible and borne by employees, companies have no clear incentive to bargain for low plan administrative costs. Since employees are locked into the plan (as it is attached to employment), you have lack of liquidity (you need to change your job to change your 401(k) plan) and asymmetry of information. I was always under the impression that these were not ideal free market conditions.
None of this is to say that these plans are necessarily bad nor that any particular company has a questionable plan in place. But it is a call to think carefully about what the incentive and information structure look like. After all, if we get this wrong it has a fairly major impact on the future.
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