Occupy 401(k) Plan


The “occupy” crowd led a revolt against against Bank of America over a $5 debit card fee (I know, it wasn’t just about the $5), and BofA changed their minds. Netflix lost about 1 million subscribers when they raised their prices by 60% on one of their programs. A few months later, their decision to spin off the DVD-by-mail program into a separate business was met with so many protests that Netflix scratched the plan. Yet 401(k) investors are losing hundreds, perhaps thousands, of dollars in returns due to high mutual fund costs, but there are no protests? Where are the angry bloggers when you need them?

Last year, Wal-Mart and Merrill Lynch settled a $13.5 million class-action lawsuit with its 401(k) participants and said “it would further its goal to offer investment options with fees that are reasonable, remove mutual funds that charge high fees and provide more financial education to employees.” Wal-Mart employees probably took a hard look at the major costs in a 401(k), and realized that you don’t always get what you pay for. Let’s get at the two big costs:

1) Financial Advisor Fees or Broker Commissions

The financial advisor or broker who educates you about your 401(k) will either be receiving a commission on every dollar you invest, or is charging an ongoing “advisory fee.” The latter is preferred, as that means your professional may be acting as a fiduciary (having to put the employee’s financial interests ahead of his own, which typically translates to a low cost investment menu).

2) Mutual Fund Expense Ratios

Mutual fund managers gotta eat too. Well, this is how they get to do so. The average expense ratio for an actively managed mutual fund is 8x greater than a Vanguard index fund*. You can check out your fund’s costs at the fund’s website, or at Morningstar’s website. Your employer’s plan should be offering you a menu of index funds, where the expense ratios typically drop to between 0.20-0.50%. If your portfolio isn’t constructed using low cost (index) funds, you may be paying as much as 8x more than you need to be paying. If there is one cost worth making a fuss over, it’s this one!

All in all, if your total costs exceed 1.5% (commissions, 401(k) admin fees, advisory fees, fund expense ratios), in any year, you are paying too much.

The two best questions you can ask your employer:

  • Does our 401(k)’s financial advisor receive commissions or advisory fees?
  • What are the total costs of my 401(k) – for everything?

In the end, fees that don’t add value will translate into a smaller nest egg, requiring extra years of work. If my words aren’t motivating you, then perhaps Daniel Solin’s book, “The Smartest 401k Book You’ll Ever Read”, will put you over the edge. No occupying of any streets is required – but a 15 minute conversation with your HR department could benefit everyone at the company and save you thousands of dollars! Geico’s got nothing on that 15 minutes.