Updated: 8/17/2012 7:28 PM ET|
Is your 401k ripping you off?
"At smaller companies, the owners . . . are busy with other things," Harris said. "The owner might say, 'I need a 401k. OK, let's talk to my insurance guy.' "
Insurers are often more willing than big mutual fund companies to take on small accounts. Unfortunately, insurers typically offer more expensive investment options. Participants in small plans also can wind up paying proportionately more for various account services, since the costs are spread over fewer people.
One way to see if your plan's fees are reasonable is to look up your company on BrightScope, a financial information company that offers retirement plan ratings. (The site may not have a rating for small plans, however, because of lack of data.) If you register, you also can get a free "personal fee report" that summarizes what you're paying for your investments.
Then take a close look at your 401k disclosure forms. If you're seeing total annual costs for an investment option that exceed 1%, you should do a little digging. You can use a site such as Morningstar to check the expense ratios of comparable funds. (Vanguard typically offers low-cost versions of various mutual funds.) If your plan's option is significantly more expensive, or if the total expenses on any option top 2%, it's time to act. You can:
- Put your own money in cheaper options, for now. The Department of Labor warns that "cheaper isn't always better" -- perhaps not always, but often it is. There's no evidence that paying more for an investment guarantees better returns; in fact, the opposite is usually true. Low-cost index funds, exchange-traded funds or target-date funds may be your best choices.
- Let your employer know you care about costs. Recruit your co-workers, if you can, to request lower-cost options. You also might volunteer to serve on any committee that evaluates plan providers or investment options.
- Suggest automatic enrollment. Automatic enrollment significantly boosts participation in 401k plans, since people have to make the effort to opt out, rather than to sign up. Higher participation means more money in the plan, which means more clout in negotiating with providers. Automatic enrollment isn't always a slam dunk -- it may be too expensive for companies with a generous match or impractical for companies with high turnover. Often, though, tapping people's basic inertia can benefit both them and the plan.
- Enlist the top dogs. High earners -- top executives at bigger companies, the owner at smaller ones -- may have contributed more than average workers to the 401k plan. If so, they have more money at stake, and should care even more than the average worker about what happens to it. Send them a link to this article, or print it out and leave it on their desks.
- Invest on your own. If your plan continues to reek, you may need to take more of your retirement into your own hands by investing outside the 401k. If your company offers a match, you should contribute enough to the 401k to get the full amount. But you also can contribute up to $5,000 a year to an IRA or a Roth IRA ($6,000 if you're 50 and over). Set up one of these accounts at a low-cost provider, and you'll have a world of investments from which to choose.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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While I believe the disclosures are a good thing, I just received mine, and it seems to be layed out and formatted to be deliberately confusing with crazy colors and buried headings. I'm a fairly intelligent person, but it took me quite a while before I understood it. I just wonder how many people will study it to that extent or simply give up and deem it a bunch of mumbo jumbo that doesn't affect them.
And about those buried fees... A few years back my employer brought in a rep from our 401K company to answer questions and encourage people to sign up or increase contributions. During the meeting, I pressed the guy to explain all the fees. He insisted that there were no fees. My obvious follow-up question was, "Then how does your company make money?" He had no good answer. He appeared to be a very good liar, and it later hit me that he probably believed what he was saying. I mean, he probably wasn't at a high enough level in his company to be privy to all their tricks. Without the new mandatory disclosures, how on earth would any of us ever find out the truth? And I guess part of me is still skeptical that the disclosures will include all the fees.
As long as greed exist in the world we will have people being ripped off!
All these 401K charges were approved by congress at some point.....lobbying money paying of.....
Same as LTD insurance (long term disability insurance)...if you ever get sick and need to claim LTD insurance, the insurance doctor has the last say and he doesn't EVEN HAVE TO SEE YOU....that one was signed by Reagan.....look at the fine print of your policy.
What can anyone really do if your 401K is ripping you off....stop saving .....Our government already knew it was ripping you of because they signed the bill.
i am a 401k consultant / advisor. the new DOL regulations regarding fee disclosure will do what the author says...give employers and participants better info about the fees they are paying. for an advisor like me, who charges at the lower end of the spectrum anyway, it's a tremendous opportunity for me to review plans, and show employers where they can get better service at a lower cost (a cost structure already built in to my business model). i take issue with some of the author's analogies at the very outset of the article (the car analogy is really off base), because the expense info has always been available, and readily provided to those that asked for it. the new regs require an even fuller disclosure, on a mandatory basis. if you've gotten yours already, it's probably 8-10 pages and it will glaze your eyes over.
for those on this string who cannot appreciate or do not understand how these plans really work, let me give you another way to look at this...
you come to work
you earn a paycheck
you put some back for retirement (i.e. PERSONAL RESPONSIBILITY)
your employer adds some to the account (their contribution, which is NOT MANDATORY)
let's say its a $1-$1 match like in safe harbor plans...you basically doubled your money, done so on a tax-deferred basis, without impact of investment returns. positive returns compound this upside, and it would take a 50% loss on new money EVERY YEAR for you to basically break even with your own money!!!! how is that a bad deal?
This is where Wall Street rips you off. The stock market isn't rigged (the bond market is another story). The Wall Street guys invest your money (so they don't even have to save their own) and can get a 1.5% or greater return (in some cases) for themselves all the while under performing the broad market. You can't even get a guaranteed one year return of 1.5% on your own money. There is no reason to pay someone that much to underperform. No one and I repeat no one is good enough to outperform the market while managing tens or hundreds of millions. The only reason they can get away with it is because your 401k likely puts you into these crapy funds and because so many consumers are don't know much about finance.
Plenty of funds to chose from, ALWAYS the lowest cost and many have stellar returns.
During the meltdown you heard and continue to hear many big, established mucky muck firms going under or investing badly or gorging themselves on bail out money, or being investigated for breach of fiduciary trust.
Did you hear the name Vanguard? No, no you didn't.
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