By Scott Burns

Q. Can you comment on the reply my HR Manager gave regarding our company’s choice of Prudential rather than Vanguard as the manager of our 401K plan? He said they had sought bids on the plan. The total cost of the response from Prudential was lower than the cost from Vanguard because more is involved in plan expenses than fund expense ratios. —M.M., from Houston, TX

A. If the total assets in your plan— all the money contributed by all the workers— is relatively small, your HR manager is probably right. Small companies face a significant disadvantage in the 401(k) marketplace relative to large companies. Legal and recordkeeping costs tend to have minimums. These expenses add materially to plan costs. You can see the difference by comparing some industry figures.

According to www.401ksource.com the average cost of a plan with 5,000 participants with an average account value of $50,000 and $250 million in assets is 0.95 percent of assets. Of that amount, only a small portion went to administrative and record keeping expenses.

In the other direction, a plan with only 25 participants with an average account value of $10,000 and $250,000 in assets had total costs of 2.76 percent. While the cost of administration, record keeping and other non-investment expenses was tiny in the large plan at 0.01 percent of assets, the cost for the smaller plan was 1.12 percentage points. The expense of the investment options was also higher, 1.64 percent for the small plan versus 0.94 percent for the large plan.

You might also note that even the large plan, at 0.95 percent of assets, is expensive relative to the reduction in expenses that you can get by using index funds. Major firms like ExxonMobil and Texas Instruments, for instance, have 401(k) plan expenses of 0.15 percent or less because they use index funds as investment options.

This is why everyone who works for a company that offers a 401(k) plan should take the time to learn what the plan costs. Unless the employer is also providing a hefty match, an expensive plan is a good reason to invest via an IRA account rather than the 401(k) account. In the extreme example cited above, where account expenses totaled 2.76 percent a year, all employees would be 2.61 percent a year better off by saving through an IRA with a major discount firm such as Schwab, Fidelity or Vanguard.

Q. Many news articles are discussing the Gang of Six tax reform plan and include the following comments:

The tax reform outline would set up three income tax rates -- a bottom rate of 8 percent to 12 percent; a middle rate of 14 percent to 22 percent; and a top rate of 23 percent to 29 percent -- to replace the current system that has a bottom rate of 10 percent with five additional rates, topping out at 35 percent.

It would reduce but not eliminate tax breaks on mortgage interest, higher-cost health plans, charitable deductions, retirement savings such as individual retirement accounts and tax-free savings accounts such as 401(k) s and tax credits for families with children.

I understand the impact of eliminating the deductions for mortgage interest, higher-cost health plans, charitable deductions, and tax credits for families with children. But I am unable to locate the details surrounding the impact on the retirement savings such as individual retirement accounts and tax-free savings accounts known as 401(k) s.  Are they planning to eliminate the tax deduction, the deferred interest or both?  Any information that you could provide would be helpful.—D.M., Houston, Texas

A. The broad brush strokes of the proposed changes in our tax system were taken from the recommendations of the report of the bipartisan National Commission on Fiscal Responsibility and Reform. The basic idea is to broaden the tax base enough to reduce tax rates rather than raise them.

The limit on contributions to retirement plan saving, for instance, would be reduced from the current maximum of $49,000 a year for some plans to $20,000 for ALL plans. This will be felt by some top earners, but it is unlikely to have any impact at all on the vast majority of workers.