Three consecutive quarters of losses have many people frowning when they review their 401(k) statements. But they’d be fighting mad if they saw the fees they’re paying to brokers and administrators who manage their 401(k) money. Daniel Solin latest book, “The Smartest 401(k) Book You’ll Ever Read” states that ”…excessive 401(k) fees will cost you as much as 20 percent of your retirement assets [p.56]”. Solin go on to say, “…you can’t get outraged about price if you don’t know what you’re paying [p.56], and “[T]he retirement dreams of millions of Americans are being jeopardized because few people are gong to complain about something they can’t see and don’t understand [p.57]”. The sad truth is that employers have paid little attention to the fees built into 401(k) plans because they don’t pay them: you do.
Likewise, the watchdogs of the securities industries (most pension plan assets are invested in mutual funds), the U.S. Securities and Exchange Commission and FINRA (Financial Industry Regulatory Authority), are more concerned with the health of the mutual fund companies and their brokers than they are with your financial well-being. Luckily, the Department of Labor and the courts has taken an interest in the abuses running amok in the pension plan business.
On February 20, 2008, the U.S. Supreme Court rules unanmously that individual 401(k) plan participants have a right to recover losses if their employer fails to uphold their fiduciary obligations. This landmark decision means that 50 million Americans now putting their retirement money into 401k plans sponsored by their employers have a right to recover their losses if those responsible for administering the plans don’t fulfill what’s considered their obligation to manage their plans wisely. No doubt the legal community will take this Supreme Court decision as a lifting of the lid on Pandora’s Box to go after employers, mutual fund companies, third party administrators, brokers and others that are enriching themselves at the expense of working Americans. In fact, this trend has already started as you can see by doing a search titled “401(k) Class Action Lawsuits”.
The Labor Department is proposing a rule that would require employers to disclose to workers the fees and expenses charged by mutual funds and other investments in a chart or similar format. Obviously the DOL thinks that the transparency of fees and charges are obscure or they would not be usurping the power of the securities industry regulators by taking the initiative to police 401(k) investment disclosures. How do you find out what type of fees you’re paying in your employer’s plan? For starters, you’ll not find them on your quarterly statement. Generally you can find them on the web site for the mutual fund in which you’ve invested. Look under Fund Facts. Also, if you would have read the prospectus of the mutual fund you purchased, you could have found the fees if you were willing to devote substantial time and effort looking.
The prospectus is a very long, legally-written and hopelessly complicated document supplied by the mutual fund company, and blessed by the SEC, which is totally incomprehensible by the average person. This gobbledegook’s real purpose is to provide a legal shield for the players who recommend, select and manage the mutual funds that are options in your 401(k) plan. The asset management fees and the administration fees are totally intertwined and the average worker will never be able to uncover the true cost. But, rest assured that in most cases the fees for the broker, administrator, investment company and everyone else who collect fees from your 401(k) comes out of your earnings. And, if you don’t have earnings — which as been the case lately — they come out of the hard-earned money you contribute monthly for your golden years.
Is there any way to lower your fees? Not really, you see your employer, or a committee set up by your employer, selects the investment options available in your plan. Suffice it to say, there is little thought that goes into such selection because your employer is indifferent since you pay the fees and your co-workers who participate in this democratic process are generally unqualified. Of course, the broker is there to make sure the correct options are chosen. You should know that the broker has a vested interest in having high fees because they determine his/her commissions.
So, what can you do? You can demand that low-load or index-linked or exchange-traded mutual funds are included in your plan. Ironically, not only are the fees lower on these fund selections but the performance is generally superior to those chosen by the high-fee, hyperactive managed dogs recommended by your broker. You can insist that your employer put an in-service, non-hardship withdrawal provision in your plan which allows you to take out of the plan the vested money your employer has contributed at an age below 59-1/2. Also, this non-hardship provision will allow you to take the money you’ve contributed at age 59-1/2 without penalty and without triggering taxes if done correctly. Sadly, your employer is generally not aware of such provisions and you can bet your last dollar that the broker or administrator are not going to break their silence. Here’s some reading material for you:
- “The Smartest 401(k) Book You’ll Ever Read” by Daniel Solin.
- “The Hidden Escape Hatch in 401(k) Plans” by Shelby Smith & Whet Smith.
- “Plan Would Make Tending to Your 401(k) Easier” by Christopher S. Rugaber, Associated Press, July 28, 2008. Check out the following web sites:
