In a previous post (Occupy 401k), I discussed why you should be more angry about hidden 401(k) fees than a $5 monthly ATM fee. Well, check your 3rd quarter 401(k) statement, and you might find some new treats in it. The Dept of Labor finally stepped it up, and 401(k) plans are now having to disclose, well, everything.
Here are 5 tips for what to do with the new 401(k) disclosures:
1) The abandoned 401(k) – If you still haven’t rolled a 401(k) account from an ex-employer to your own personal IRA, perhaps the fees spotlight will motivate you. Without a company match, there are more reasons to roll it to an IRA than to keep in there. If your financial advisor has access to sophisticated trading and rebalancing tools, rolling it to an IRA will allow you to create a more tax-efficient total portfolio. In other words, if you are also contributing to a personal or joint investment account, you can “place” the tax-efficient assets in your taxable account and the tax-inefficient funds in your IRA.
2) Fund expenses – If your 401(k) expense ratio is more than 1%, raise more than an eyebrow. While there are some investments that can justify their higher costs, it’s rarely the case with stock and bond mutual funds. Very few of these funds can add long-term value over good old fashioned low cost index funds.
3) Benchmarks – Don’t have an impulsive overreaction to the new disclosures – For example, using short-term track record to assess a fund’s long-term prospects isn’t wise. You wouldn’t go killing a plant with strong roots because of a few bad leaves. Benchmarks are notoriously apples-to-oranges, but advisors and brokers sleep better knowing they at least gave you something to judge the fund against. Your 401(k) may only give you one or two choices for a given asset class such as, say, large cap growth stocks. Don’t give up on an entire segment of the stock market because the fund you’re being offered does worse than a benchmark. Consider focusing on fund costs instead. If you have 3 choices for an asset class, you may want to go with the lowest cost choice. If an index fund isn’t being offered for large, small, or international stocks, you may want to contact your plan sponsor.
4) Size matters – Mom and Pop businesses don’t usually have the economies of scale of large corporation. So it won’t be fair to assume your plan’s administrative costs should be similar to some industry average.
5) Fees YOU should be paying – In my experience, most sponsors (your employer), cover the administrative costs of a plan. These are all the extra costs you would pay for a 401(k) that you wouldn’t find with, say, an IRA. The website you log into to view your balance, the person who advises your sponsor how to stay in compliance – it all costs money. The textbook (and I think most logical) scenario is this: Your employer covers anything that could be labeled as “administrative” and you (the employee) should be paying for the mutual fund costs, and any related investment advisory fees or (gulp) commissions, if your sponsor hired a broker instead of a fee-based advisor.
In the end, your investment experience will most likely be steered more by your ability to save (defer) healthy portions of your income and stay the course in tough times, than it will by your 401(k)’s expenses. If you’re not at least maxing out at your 401(k) to the point where your employer gives you a match, you are likely not on track to enjoying any kind of retirement in your 50s or 60s. A little sacrifice now will pay the biggest dividend later – good old fashioned financial freedom.
The opinions expressed are those of the author and are subject to change without notice in reaction to shifting market conditions. This blog is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.