The Department of Labor wants to smoke out those nefarioushidden fees that beset 401(k) plans.

That’s the purpose of 408(b)(2) – the Fee Disclosure Rule – andits companion act that requires this data be submitted to planinvestors starting at the end of August. Yet we’ve already seen aninitial series of reports, white papers and mainstream mediaarticles that focus on the long-disclosed mutual fund expenseratio.

Mutual fund expense ratios have three critical traits.

First, since their advent, registered investment companies havebeen required to report their financials, including their expenseratio, on a semi-annual basis. This gives mutual fund expenseratios something few other investment products possess – clearmeasurability.

Second, these accounting reports also contain the fund’s actualinvestment performance. The Securities and Exchange Committee, ofcourse, discourages funds from highlighting performance byrequiring them to issue that now famous caveat “past performancecannot guarantee future results.”

So, unlike a mutual fund expense ratio, we can’t throw aroundmutual fund performance in an easy to remember (and misleading)sound bite.

Finally, several academic studies, culminating with Mark M.Carhartt’s famous 1997 paper “On persistence in mutual fundperformance,” (Journal of Finance, 52, 57-82) show a strongcorrelation between high costs and lower performance.

Of course, Carhartt focused on many factors, including mutualfund loads and turnover, not just on a mutual fund’s expense ratio.Furthermore, “investment costs” (Carhartt was correct not tomislabel them “expenses”) was merely his third conclusion when itcame to maximizing fund performance.

His primary conclusion advised avoiding funds with persistentlypoor performance and his secondary conclusion stated funds that didwell this year tended to do well next year (but not in the yearsthereafter).

The first trait – the ready availability of a fund’s expenseratio – has long plagued mutual funds, as it puts them at adisadvantage versus investment products not required to disclosetheir fees in a readable format like a mutual fund expenseratio.

Leveling this playing field would seem to be part of the problemthe DOL wants to address. The second trait – the de facto silenceon fund performance – and the short-hand version of the third trait– the misstatement of Carhartt conclusion as “high expense ratiofunds always lead to lower investment performance” – compounds theimpact of the first trait.

Here’s how the truth can defeat the naïve thinking that lowerexpense ratios are always good.

During the “Lost Decade,” the popular stock indices and theirlow expense ratio index fund counterparts were all either flat oractually lost money (a rarity for any given 10-year period). On thehand, in 75 percent of the Lipper categories, the average (activelymanaged and higher expense ratio) mutual fund beat the bestperforming index. If more investors knew these performance figures,maybe those “low cost” index funds would be less attractive.

Mutual fund expense ratios might get all the press, but 401(k)plan sponsors are advised to look beyond those fees and assess, asCarhartt concludes and alludes to, the impact and true value oftheir other fees.