It is not well known that many 401K plans can be expensive for investors to keep money inside of. Most employees never see the real cost of owning mutual funds through their 401K, and in fact, most people think of it as a FREE benefit from their employer. This is completely understandable since your employer is often matching part of your contribution and you don’t ever see the fees come out. But new changes in legislation will now make it easier for employees to see just how much they’re paying to keep money inside their 401K plans. As of August 1st, 2012 the Department of Labor is now requiring all 401K plans to give full and clear disclosure of the all-in costs of having money in your 401K plans. This will be a shock to many employees if they actually review this information.
Many employers set up their 401K plans in a way that minimizes the cost to them and shifts more of the cost to the employees. They can do this by paying a small annual administration fee and then selecting investments that have higher internal costs. Those internal costs are paid by the investors who put money into them, which is mostly coming from all the employees. These internal costs are already disclosed in the fund prospectuses, but if you’ve ever read a prospectus you know that they are written by attorneys, and you would probably rather eat shards of broken glass than ever read another one. Most people have never read a prospectus from a fund that they own. The new law will require employers to give employees full and clear disclosure of all the costs associated with 401K investing.
With a 401K plan that is set up to pass along the bulk of the costs to employees, they can be paying as much as 2% or more per year in investment costs and not even know it. These extra costs eat away at your performance and translate into a lot less money in your account when you retire. Because of this, employees need to be careful to select investments that both meet their planning and allocation goals, and also keep fees at a minimum. As an example: If you have $250,000 in your 401K and you’re paying an extra 1% in investment fees per year, that equals and extra $2500 per year in additional fees. In just 10 years that would be $25,000 if you assume no growth or additional conributions to your plan. In reality, what most people will end up paying before they retire will be a lot more than that.
Here is a report from ABC News just a few months ago on this very subject:
What can you do about this?
There are many things you can do to reduce the amount of fees you’re paying in your 401K plan. The first thing you should do is review the investment choices inside your plan and find the mutual funds that have the best balance of good performance and low fees. This will add an extra layer of research for you to analyze the fees, but it will be well worth it. You may want to consider hiring a professional to help you with this, as it may be well worth the expense. At Turning Point Financial we provide this service for a flat fee of $150.
Here is what our service includes:
Step 1: First we will have you complete an interview questionnaire that will tell us about your financial situation and risk tolerance. You can find the interview “HERE”
Step 2: Next you need to provide us with a list of the available investment choices inside your 401K plan. You can usually get these in digital format and then email them to us at firstname.lastname@example.org Or you can fax them to us at 704-243-4252. Make sure to include your name, phone number, and your employers name with your fax or email.
Step 3: We will then analyze the investment choices inside your plan to find those that have the best balance of low fees and good performance. Based on your responses to the interview questionnaire, we will be able to formulate an investment strategy for your 401K plan.
Step 4: We will provide you with a recommendation of how to allocate your money inside the plan. We will email this to you and also personally call and speak with you to make sure you are comfortable with the recommendation. If not, we can make adjustments to make it customize it to your comfort level.
Whether you hire us to assist you with this process, or you do it on your own, you will be able to minimize the fees that you’re paying, maximize the returns of your investment dollars, and minimize the risk of losing money due to being in the wrong funds.
The other choice you have is to do an in-service rollover of part of your money to an IRA while you’re still working. This is a non-taxable event, and would allow you to get most of your money into a less expensive IRA where you also have more investment choices to choose from. My next post will give more information about doing this.
Until then, enjoy the day!