Your cash is costing you

FORTUNE -- I thought I was clever. Earlier this year I had over half of my 401k assets in cash. I know that investors are terrible at timing the market and I'm way too young not to be fully invested, but I can't get over the fact that stocks look expensive right now.

I thought I was smart until I got my Fidelity 401k materials in the mail. It turns out that Fidelity Cash Reserves, the $118-billion money market fund where my cash is held, charges annual expenses of 0.31%. That's more than three times the 0.10% expense ratio Fidelity charges for its S&P 500 index fund, which also happens to have yielded 1.9% during the past year compared to a 0.01% yield for cash reserves.

I'm not the only one annoyed with the fees. "It doesn't make any sense that a money market fund should charge three times more than a large cap index fund," says Ryan Alfred, president of BrightScope, which analyzes 85% of the country's 401k plans for the benefit of individual investors. Alfred argues that Fidelity and other 401k plan administrators are gouging investors in their own plans. (Fidelity Investments is the largest 401k provider with 27% market share in the U.S., followed by Aon Hewitt (AON, Fortune 500) with 8.8% and Vanguard with 7.7%, according to Cerulli Associates.) Alfred's point is that if Fidelity runs your 401k plan, you don't have much choice but to use their products.

"Fidelity will tell you all day long they're open architecture -- for example, they offer PIMCO's Total Return Fund," Alfred says. "But at the end of day, they want to keep money market and cash options with Fidelity. They have places where they know they can make money." (The cash reserve fund's fees, by the way, produce an estimated $365 million of annual revenue for Fidelity, using today's assets.)

Fidelity can't be blamed for the Federal Reserve's policy of near zero-percent interest rates, which causes money market yields to hover near zero. But it can be blamed for charging almost the same fees that it did in 2008, when the cash reserves fund yielded 3.4%.

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A Fidelity spokesman responded to the criticism by highlighting the research costs associated with money market funds, especially amid European debt worries. "Fidelity has long made a significant investment in its money market research capabilities," says spokesman Adam Banker. "Fidelity's research team makes its own independent minimal credit risk determinations on every issuer or security in the money market funds."

While Fidelity is guilty of bad appearances, the fund giant is not alone. The average expense ratio for U.S. money market funds is 0.18%, according to Crane Data. That reduces the average yield to a measly 0.05%. Many providers, Fidelity included, have actually forgone some fees on money market accounts to keep the funds' weekly yield from going negative -- something investors really hate to see in statements.

To be sure, cash assets are a small percentage of the $3 trillion in 401k assets in the U.S. According to the Investment Company Institute, Americans held 4.4% of 401k assets in money market funds as of 2010. But the figure -- more than $100 billion -- is sizable, and it's likely to rise because of changes to one money market alternative: stable value funds.

Stable value funds offer a cash-like alternative for 401k investors. The funds hold riskier assets than do money market funds, and therefore produce a much higher yield. In the third quarter the average expected yield hit 3%, according to the Stable Value Investment Association. Because stable value funds buy insurance to ensure the fund's value doesn't fall, they are considered nearly as safe as money market funds. The problem is that today insurance is expensive given the European debt crisis and slow economic recovery. Last March, Charles Schwab (SCHW, Fortune 500) announced it was closing its stable value fund with $8 billion in assets. Merrill Lynch liquidated its $10 billion Retirement Preservation Trust stable value fund in 2010.

Liquidating stable value fund assets may trickle into money market accounts over the next few years. Whether they should is another question, says Morningstar's Director of Personal Finance Christine Benz. "If you're someone with a long term horizon" -- which many 401k investors are -- "why are you holding that much cash?"

Between money market funds and stable value funds, the average American 401k had 14% of assets in cash. That compares to 42% in stocks. Time and again research shows professional money managers are no good at timing the market. Regular investors are even worse. That's reason enough to suggest that individual investors don't bother, Benz suggests.

But if you're like me, thinking stocks are pricey and expecting investors to panic sometime over the next few years, Benz's advice is unlikely to sway you. What might, however, is the cost of holding cash instead.

Correction: An earlier version of this story said Fidelity's cash reserve fund's fees produce an estimated $36.5 million of annual revenue. They produce an estimated $365 million in annual revenue.