If you participate in a 401k you should be aware of 401k fees.
Many people think that there are no fees associated with a 401k and that’s a very costly mistake. I say that because, in most cases 401k plans are extremely expensive. But that isn’t even the biggest problem. The biggest problem is that based on the mistaken belief that 401k plans cost them nothing, they keep their money in those plans long after they should have completed a tax free IRA rollover. And by failing do the rollover, they might hurt their beneficiaries and they certainly limit the investment options they have available.
What are the 401k fees and costs?
The first level of costs is buried in the funds themselves. Most 401k plans have a variety of funds to select from. This may come as a surprise to some people, but those funds don’t work for free. They have to get paid and the participants are the ones who do they paying.
They get paid by charging fees. It’s often very difficult to determine the cost of the funds within your 401k plan (it’s also difficult to do any mutual fund evaluation on the plan funds because it’s almost impossible to get data). In most cases, your employer doesn’t know the cost of the funds either. According to Investment News magazine, group annuities which are often used in 401k plans charge participants more than 2% annually. And this is without providing any advice to the participants. What are they doing that’s worth that 2%? Not much.
What you can do about high 401k fees.
Of course one thing you can do is quit your job and roll your 401k to an IRA. But in an atmosphere of near 10% unemployment, I wouldn’t recommend this course of action. Fortunately, there are other alternatives. The best thing you can do is talk to your human resource department. Make them aware of your concerns. This isn’t a short-term fix, but it might make a huge difference for you and your co-workers. The plan administrator might look for a plan that offers less expensive ETF investments for the 401k. That would be a good start at least.
While you’re speaking to HR, remind them that the Labor Department is coming out with new rules that govern 401k plans. As I said above, most plans charge high fees, don’t disclose them and provide no ongoing advice to you and the other participants. That’s a raw deal for everyone – except the investment providers.
The Labor Department is trying to change that but your HR people may not be aware of this. One rule expands fiduciary duty to everyone who advises on plan assets. That rule is about to go into effect on January 1st of 2012. And proposals are on the books to force plan providers to disclose all plan fees. These plans are going to give insurance agents migraines – they are the people who traditionally sell 401k plans to employers. This is a huge issue for them because they may not have the plans that disclose fees and they certainly don’t provide fiduciary duty. The good news is your employer can switch plans (usually once a year) to something much more plan-participant friendly. They don’t have to stick to the same old plan. And they don’ have to stick with the same agent either. Educate your HR department on this.
While insurance agents will find it increasingly difficult to service the 401k market, independent Registered Investment Advisors are well situated to step up to the plate. That’s because they already act as fiduciaries and are used to full disclosure. (Speaking of disclosure, let me be transparent right here. I’m an Registered Investment Advisor so I definitely have a horse in this race. Just the same, facts are facts.)
If you are a participant in your company’s 401k, you have a lot at stake. People often accumulate most of their financial assets in retirement plans. That being the case, it’s in your interest to make sure you have the best plan possible. Speak with your HR department. Encourage them to look into options. Ask for more investment disclosure with respect to fees and ask for more investment options with lower costs and greater access to objective advice. You have too much on the line to ignore this.