If your 401(k)’s composite expense ratio is higher than 0.1%
a year, then you should be looking for an escape hatch. It could save you a
pile of money. If the mere question about ratios leaves you flummoxed, you have
company. Plenty of employees don’t pay attention to what they are losing to
fund fees. The difference between high-cost funds and
low-cost funds could easily add up over the course of a career to several
hundred thousand dollars.
The operators of retirement plans and even employers do not
necessarily mind the state of confusion that prevails. One way or another the
considerable paperwork cost of a 401(k) must be paid, and the most common way
to do that is to extract it via fund expense ratios. The plan may offer a few
bargain funds, yet still depend for its economics on having most of the workers
wander blindly into higher-fee options.
A survey by benefits consultants Aon Hewitt found that 76%
of large employers have workers pick up all the costs of 401(k) administration.
Among employers that push all or some of the costs onto employees, a rising
minority (now 26%) assess account administration fees, such as $25 per account
per year. The rest continue the tradition of burying costs in overpriced funds,
a practice that helps youngsters with tiny balances but hurts workers who have
been around long enough to accumulate respectable sums.
What to do if you are trapped in a high-cost plan?
Complain. Oracle offers its employees a liberal low-cost
brokerage account as well as mutual funds with fees as low as 0.02%. Why can’t
we get that?
Use the window. It will almost always save you money once your
balance hits six figures.
Counterbalance. Get whatever is cheap, and if that leaves you
lopsided, fix the problem using assets outside the plan.
Make a withdrawal. Some plans allow some workers to take out
some or all of their money while still employed. The restrictions may relate to
your age and/or how much of the money came from company matches. Proceed
cautiously, and arrange a custodian-to-custodian transfer so that you don’t
have tax problems.
Quit. When you change jobs, you can roll your account into an
IRA that has no account administration charge. You can then buy any ETF you
want.
Why do brokers have better deals for small IRAs than they do
for 401(k) plans with thousands of participants? One reason is the plans have
to prove that they are not discriminating against low-paid workers. Individual
savers do not.
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