Alicia Munnell, director of the Center for Retirement
Research at Boston College, recently dropped a bomb: Her center's research
uncovered the fact that defined contribution plans, such as 401(k) plans,
provide about the same percentage of a retirees' income that pensions once did.
Even if 401(k) plans are the way a majority of Americans pay for retirement
now, most people still don't know how to evaluate whether or not they have a
good plan. A bad plan, with exorbitant fees and poor fund choices, can mean
surrendering hundreds of thousands of dollars in retirement savings during the
years of investing.
Baffling number of
fees
Much of the confusion stems from all the different fees
401(k) plans charge. There are three main ones. The biggest is the investment
management fee, which pays for investing your money. Fees can range from 10
basis points for institutional shares of index funds up to 2 percent or 3
percent of assets for actively managed funds.
All in, 401(k) fees can range from 50 basis points up to 3
percent, said David Walters, a CPA and certified financial planner with
Palisades Hudson Financial Group. Any plan charging more than 1 percent,
Walters insisted, should be seen as suspect.
Small-firm workers
fare worse
Of course, it's not always possible to get the best
retirement plans available. Small companies typically have plans with higher
fees because they don't have the negotiating leverage to drive down fees from
plan providers. And those companies don't have in-house experts to research
plans and make sure their employees are getting a good deal.
Plans with less than a $1 million pay 1.60 percent in fees.
Meanwhile, those with more than a $1 billion only pay 33 basis points (or 0.33
percent), according to research firm BrightScope, which ranks retirement plans.
Better 401(k) plans
now
The good news is that 401(k) fees are coming down, according
to BrightScope. In 2009 the average plan cost was 1 percent, but in 2012 that
had come down to 0.91 percent, or 91 basis points, a pretty dramatic decline.
There are a number of reasons for this. First, employers
themselves deserve some of the credit. They have a fiduciary responsibility to
pick the best plan and investment options for their employees. A number of
class-action lawsuits — most recently against Boeing — underscore this
responsibility. In August, Boeing settled with employees that accused the
aircraft maker of mishandling their plan by allowing them to pay excessive
fees. Second, index funds — which usually have lower fees — are more common.
Eighty-eight percent of plans have them.
New regulations have
an impact
Lastly, in 2012 the Department of Labor mandated that
employers must disclose fund fees to their participants annually. Despite the
disclosures, the majority of participants probably don't look at them, said
Rick Meigs, president of 401khelpcenter.com.
The DOL regulation has enabled FeeX to trawl these annual
reports and analyze individual 401(k) plans and IRAs. The firm suggests alternative
investments within each plan to bring fees down.
Making a bad plan
better
Even with all the changes for the better, some workers are
still stuck with crummy 401(k) plans. If that's the case, said Walters, look
for workarounds to put yourself in better financial shape. Since the biggest
401(k) expense is the cost of the underlying funds — accounting for two-thirds
to three-quarters — it makes sense to start there.
Use index funds when you can, which tend to be less
expensive than actively managed ones. But don't assume you're getting a steal
just because it's an index fund, said Fattibene of Harvest Financial Partners.
Look out the window
Since about half of 401(k) plans have a brokerage window,
which allows you to invest in any mutual fund, exchange-traded fund or stock
that is available for trade at any brokerage, you might be able to bring your
costs down by using it. The brokerage window gives you access to the whole
universe of low-cost fund options and exchange-traded funds.
Talk to the biggest
plan participant
If you're ready to take matters into your own hands, talk to
you boss about how to improve the plan. In small companies, the company owner
is likely to be the plan's largest participant and is shouldering the bulk of
the fees. Remember to tread gently, experts say.
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