Not All 401k’s Are Alike: How to Recognize and Fix a Bad 401k
Most people believe that a 401k is beneficial. This type of investment can provide the same percentage of a retired person's income that pensions once provided. However, there are millions of people haven't a clue whether their 401k plan is a good one. Many have inadequate funding options and excessive fees.
It could end up causing you to lose hundreds to thousands annually. The costs associated with a plan will range, making it a complicated ordeal to find out what you are paying. According to an AARP survey, there are not many who catch that they are in fact paying someone to invest into their plan.
What Do the Fees Look Like?
There is a lot of confusion around the charges these plans can have. The largest of three standard fees is known as the investment management fee. The costs can vary from up to 2% to 3% of assets for actively managed funds down to 10 basis points for institutional shares of index funds. There is also a plan administration fee paid to businesses that run day-to-day management of the plan. Expect to pay around $100-$200 if it’s out of pocket. The last of the three is the 12b-1 charge – a recurring fee used to fund commissions for salespeople and brokers.
On top of these three main fees, count on an individual service fee for additional services, like loans from your 401k or for using a brokerage window.
David Walters, CPA and certified financial planner with Palisades Hudson Financial Group said that altogether, the charges can range from 50 basis points (which is half a percent) up to 3%. He believes people should be suspicious of those that ask over 1%. He also noted that it could make a significant difference in what workers get to spend when they retire.
A report by the liberal think tank Demos found that married couples who invested consistently and never made withdrawals would have lost up to $154,000 in fees, about a third their entire savings.
Are There Any Stats?
It may not always be possible to get the best plans out there. Small companies, in particular, have more fees as they don’t have any negotiating leverage to reduce them. They often do not in-house experts to research plans and find the best deal for the employees.
Yoav Zurel, CEO of FeeX, says one shouldn't assume that working for a large company means you will have minimal fees or optimal investment options. He adds that only about 40% of the largest companies have optimized their 401k.
The good news is that according to BrightScope, 401k charges have been dropping annually since 2009, and the pattern is expected to continue.
This is most likely because more people are learning to pick the best plans possible for them. Brooks Herman, Bright Scope's director of research, said that it’s because of the rise in plan sponsor awareness. In 2012, the Department of Labor mentioned that companies are to disclose fund fees to their customers each year.
Rick Meigs, president of 401khelpcenter.com, said that even with that, few people ever take the time to read over their plans. Still, he commented there is always that one individual from the pool of employees that will take the time to read it and when they take the time to do go through it, it benefits the majority.
Is it Possible to Make a Bad Plan Work?
FeeX has researched and analyzed annual reports and individual plans. They suggest alternative investments within each plan to lower charges.
Even with new disclosures, some workers may still be stuck with less than ideal plans. If you are in that predicament, Walters believes it’s best to find workarounds to place yourself in a better financial position.
You can begin by using index plans as they often have lower charges and 88% of plans include them. However, don’t think that’s the only answer. S&P 500 funds can charge 80 basis points when you can get the same thing from Vanguard for only five basis points. Nearly 50% of 401k plans have brokerage windows that allow you to invest in any mutual fund, exchange-traded stock or fund which is available at any brokerage. Doing so may also help with lowering costs as you have access to an entire universe of low-cost fund options and exchange traded funds.
It’s time to start taking financial matters into your hands. Start talking to your spouse about it if you are married, and sit down with your boss. Talk to your boss about improving the plan for the company as a whole.
If you are currently working in a small business, the company owner will likely be the plan's biggest participant and shouldering a majority of the charges. Keep that in mind and remember to tread gently when bringing up the topic. Zurel, of FeeX, says you should never accuse your employer of anything, and instead, believe that they are doing the best that they can. After all, they too have the same interest as you and would like to have lower fees themselves.