There can be no question that saving for your own retirement is a financially sound and important thing for you to do, and one of the most common and popular methods of doing this is by investing in a 401K plan at your place of work. But what you may not know is that not all 401K plans are the same.
If you are like many people in the United States, the chances are that you have had several jobs over your working life and, as a result, still have a number of 401K plans with different former employers. Or perhaps you have recently retired, but are not yet ready to cash in your 401K plan(s). Whatever your individual circumstances may be, you should be aware that your 401K plans could actually be costing you money.
Under the current laws, not only are the companies administering your 401K allowed to charge maintenance and service fees, but they are also not required to inform you what those maintenance and services fees are. Some insurance companies and stock brokerage houses are charging as much as 4% or 5% per year off the top for the plans they administer, which can significantly decrease the annual yield and value of your plan. (There are also fees and charges associated with maintaining IRA accounts, and generally there will be management or transaction fees associated with most products.)
Specific fees that are considered to be 'hidden' are:
- Trading costs, commissions between fund managers and brokerage firms
- Soft dollar 'excess commissions' paid to brokerages pursuant to Securities
- Exchange Commission ('SEC') rule 28(e)
- Sub-shareholder (participant) servicing fees - called 'sub-transfer agent fees' ('Sub-TA')
- Account distribution (sales) based 12(b)-1 fees
- Account servicing based 12(b)-1 fees
- Unitized variable annuity wrap fees
- Variable annuity mortality costs
- 'On-the-fly' pass through fees
- Retail versions of institutional funds (i.e. funds that could be purchased at a lower price but are not, due to fiduciary ignorance)
Some of the worst offenders of high fees are insurance companies that unconscionably offer 401k accounts wrapped in annuities. This is a needless extra layer of fees that cannot be defended. Yet uninformed company managers who are not competent to make a selection are often sold on this idea by talented insurance sales people. You simply cannot trust the managers at your company to select the appropriate 401k plan provider as they are not held responsible for a bad choice.
Unfortunately, managers at many companies have signed on with 401k sponsors and simply do not understand the fees involved. Since the fees are not paid by the company, but rather by you and the other participants, the company officers have small motivation to look hard at the fees. In fact, a study by Spectrem Group showed that most plan sponsors don't know what they pay.
So unless you ask and thoroughly read the prospectus and make sure onerous fees are not being levied against your account, it's best to do an IRA rollover and not leave your funds in a high priced qualified plan.
In fact, some 401k plans allow for in-service withdrawals and if your plan does, get your money out now.
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Looks like a 401 k has more fees than anything else. Management fees and sub fees they seem to get money from you every way they can think of.
Best etf funds lists last blog post..Gold double long etf.
Great idea. I like the ira roll over. Makes sense to not pay the extra fees for a 401 k if you can own the same stocks or investments in your own ira. You do not loose money or sell the shares so you just move all the shares over.
Not only is it a good idea to roll over the 401k to avoid the fees, but you have much more flexibility on investment opportunities with a self directed IRA than you do by leaving your money into the 401k plan. I always disliked the relatively slim investment choices when it came to most of the employer sponsored 401k plans. If it wasn't for the typical company match, most of them wouldn't be worth investing in.
The problem is you only can invest in certain funds in most 401 k. You do not have many options so you will pay the fees they charge. The only way i can see not paying so much is to roll over 401 to ira after retirement.
Rudimentary, at best. Anyone who is enrolled in a corporate 401k plan, within 30 years of retirement, and doesn't know these basics, probably doesn't have they're portfolio properly invested...like putting 100% of their 401k contributions into the company stock fund!
onsider this: If your 401(k) had $100,000 invested in the average stock mutual fund at the beginning of last year, you've lost $39,500, thanks to the worst year for funds since Lipper began tracking them in 1959. You'll have to earn 66% just to get your account back to where it was a year ago.
some borrowers defer new contributions into their 401(k) plans while they repay their loans. This is a permanent loss of an opportunity to save on taxes on your retirement assets, and can be a significant disadvantage later. But if you have to stop contributing to your 401(k) in order to repay a plan loan, presumably you’d also have to stop contributing to make payments on an alternative loan outside the plan. This isn’t a reason to choose an alternative loan over a 401(k) loan—it’s just another reason not to borrow at all in the first place.
The 401k plan really does leave you with fairly limited options, as there are certain funds you can invest. Then there is the fees to take into consieration.
I considered this for my parents when looking into retirement investment opportunities, however we soon decided to go with a self directed IRA.
I guess it really depends on the individual, but it makes it hard since there are so many retirement funding options available.
Ever Wondered About the Disadvantages of a 401k Plan?
The disadvantages of 401k plan usage are few. But, if you have the option to choose, there are several things to consider and be aware of. Here are a few things that you should know about IRAs, 401Ks and Roth plans.
There are some additional risks to a plan loan. A big one is that you could wind up leaving your employer before you repay the loan. In a 401(k) plan, if this happens, you must immediately pay back the loan, or it will be considered a taxable distribution—in which case you’ll owe taxes on the loan proceeds, plus any applicable tax penalties if it’s an early distribution (i.e., if you are younger than 59½). This can make a cash-crunch situation even worse, so you need to be very sure you’re going to stay at your employer long enough to repay the loan.
As a self employed Realtor I know how important it is to save for retirement. It sounds like I am lucky to be able to contribute to a Keogh account rather than a 401k. I knew there were advantages such as the amount you can invest but did not realize the fees associated with a 401k.
I was a 401k consultant for years with one of the biggest and most respected mutual fund companies and what I noticed is most participants stay in their employer's 401k plan out of pure inertia. Their choice of investments is so much better if they roll their account over. I just don't get why more of them don't take action. Thanks for this great information! Suzanne
Letting your 401k rollover instead of leaving it in a high priced qualified plan is a smart way to lower the fees payed to managers and keep some of the funds going to the right place.
Great description of the lesser known or hidden fees. Not all 401k providers are the same. For instance we offer index funds and ETFs which carry very low fees. The management fee is .10% for a Vanguard index fund. If a fund does have commissions we will allow the employer to choose how to handle that like applying it towards reducing costs.
Right now, a retiree could have done everything right – from saving more than an adequate amount to picking the right investment options, but could still see a paltry payout from an annuity if interest rates are near lows. To offset that risk, Gale proposes continual contributions to an annuity that accumulates over, say 30, years — balancing out high and low interest rates over the years. One way to fund the annuity: Directing an employer’s match into the annuity rather than company stock or other investments.
Looks like a 401 k has more fees than anything else. Management fees and sub fees they seem to get money from you every way they can think of.
I think if we balance out high and low interest rates over the years. One way to fund the annuity: Directing an employer’s match into the annuity rather than company stock or other investments.
As a Long Beach CPA, I have worked with a financial advisor that really make the related fees transparent to his clients. I really enjoy working with him and recommending him to my clients because he outlines the fees for the different investments. Great article on this subject.
small business 401k, self employed retirement plans, small business retirement plans and QuickBooks 401k plans are good financial plans.
I honestly didn't know about the options. Our company does 401K matching. If that is discontinued due to a bad economy, perhaps it is time to do some research on an IRA?
Agreed but there are exceptions for removing money from your 401k penalty-free for economic hardships, in certain cases. You can contact any major brokerage or bank for rolling over your IRA. It is pretty simple, just have to fill out one form.
Thanks for this information I had no idea that fees for a 401k could be changed without them telling you. It also makes me think when you said that working for different jobs that some people have more than one 401k. I just wonder if I have some 401ks out there and do not know about them.
There are limited options in terms of what 401K's there are to invest in: you are held hostage to their fees.
401k plan seems a pretty nice method to:
1. get some investments going using population funds
2. get people on a starter-up savings plan which may actually open their minds a bit as far as spending goes
Right now i want to see it's downside so i'm going to keep reading a bit more about it, but so far it seems like an ok plan in my opinion
retirement seems very difficult 🙁
Even before the recent financial turmoil, it was clear there would be a separate crisis involving retirees. People relying on their 401 k are facing the quandary of how to manage their lump sums so that they have enough to meet their living costs for as long as they live..
I think the 4% or 5% per year maintenance & service charge is high as compare to other plans & this is wrong marketing practice because the customers are do not know how many fess involve in 401k plan.
Anyone who is enrolled in a corporate 401k plan, within 30 years of retirement, and doesn’t know these basics, probably doesn’t have they’re portfolio properly invested…like putting 100% of their 401k contributions into the company stock fund
you’ve got high-interest credit card debt, your top priority should be to pay that down. Debt interest rates could crush even the best retirement account returns, so it’s best to use extra funds to dispatch credit card balances quickly. The one exception? If your employer matches 401(k) contributions.
I think if we balance out high and low interest rates over the years. One way to fund the annuity: Directing an employer’s match into the annuity rather than company stock or other investments.
Due to onerous fees and for lack of their transparency one should really be careful in choosing the 401k plan, and perhaps rollover to IRA to have more money in your pocket when you retire.
If you leave or switch jobs/careers, it is best not to cash out your 401(k) and you should be able to roll it into a new one for the new job/career. Otherwise you will be paying a great deal of fees along with taxes. It can sometimes be upwards of 20-30%.
You’ve got high-interest credit card debt, your top priority should be to pay that down. Debt interest rates could crush even the best retirement account returns, so it’s best to use extra funds to dispatch credit card balances quickly. The one exception? If your employer matches 401(k) contributions.
Anyone who is enrolled in a corporate 401k plan, within 30 years of retirement, and doesn’t know these basics, probably doesn’t have they’re portfolio properly invested
I agree with Printing, even before the current recession, it was definitely clear that retirees were facing a much harder uphill battle. I have a number of friends who are retired and are now considering going back to work at 69 or 70 years old because their nest egg is not panning out like they had thought it would. A million dollars years ago was a lot more money than it is today. Also, a lot of that was lost in their investments...
This reminds me of the study that showed that 85% of students from schools like Harvard chose a mutual fund not based on actual rates (minus account mgmt fees) but on how good they sounded.
he problem comes down to this: The double-whammy of investment losses and withdrawals from your nest egg to pay living expenses dramatically increase your chances of running through your retirement savings prematurely, which is something you obviously want to avoid.
The problem comes down to this: The double-whammy of investment losses and withdrawals from your nest egg to pay living expenses dramatically increase your chances of running through your retirement savings prematurely, which is something you obviously want to avoid.
Great article indeed. My retirement was something I had slight worries about since I did not know exactly how to deal with things. These articles are sure helpful. Thanks.
sorry, actually i didn't get it if 401 k has more fees, than why i should use it?
401k management fees can really hurt, it is also quite limited in the securiies you can invest in.
401 K is huge amount, I think after retirement 401K will cause financial crisis..
The problem comes down to this: The double-whammy of investment losses and withdrawals from your nest egg to pay living expenses dramatically increase your chances of running through your retirement savings prematurely, which is something you obviously want to avoid.
Is there a law which forces the companies to disclose the fees being charged by the 401k management company as part of the disclosure?
I think if we balance out high and low interest rates over the years. One way to fund the annuity: Directing an employer’s match into the annuity rather than company stock or other investments.s
First you need to ask yourself, How much am I really paying? The all-in fee is important, but also determine the separate fees for service providers, investments and participants. All need separate examination. What does administration cost? What fees do the mutual funds really charge? How much do participants pay for loans, distributions and other services?
I’m fortunate enough not to have my retirement plan set up with 401K. It’s important to insure that your interest rates aren’t being thrown off balance. Thanks for the heads up.
Yes, it amazes me how much some financial advisors make for not doing much, just by charging annual fees based on account value. It is better to find someone who charges based on their time.
I think it's crazy how some financial advisors charge a percentage of assets when they dont really do much. I advise to find an advisor that charges based on time spent managing account.
I recommend my clients go to a financial advisor that charges by the hour and not by a % of assets. It just makes sense that way and they get more for their money.
I advise to find an advisor that charges based on time spent managing account.
Wow I had no clue you could be charged maintenance fees on a 401k, and I'm sure many retirees aren't aware of that either. It seems like they should have to inform you when fees are charged, but then again it's just a method for companies to squeeze as much money back out of you as they can so why would they bother telling you.
I don't think an IRA is worth it in this really bad economy. Fees plus withdrawal penalties. Plenty of middle aged or even younger people are needing their cash because they are losing money or a job and can't wait till retirement.
I was layed off and now am in business for myself. I read Ramit Sethi's book "I Will Teach You to Be Rich" and he recommended a Roth IRA so I took my 401(K) and now have a Roth with Vanguard.
I advise looking for a 401(K) adviser which is paid by performance instead of percentage fess.
I prefer the Roth IRA myself; considering what I make, might as well pay the taxes now! (Not to say that I'd turn down a 401(k) if it had an employer match!)
IRA roll over s such a good idea and flexibility in investment opportunities. But we have to be aware of the negative side. If you plan for a loan, you could wind up leaving your employer before you could pay your loan. Well, we have to weigh the pros and cons.
f your employer filed bankruptcy and you left your 401K balances in the plan before the bankruptcy filing, you will have a very difficult time getting your money. The Employment Retirement Income Security Act was passed in 1974 to protect the money that a worker contributes into a 401K and it does so by requiring that funds are placed into a custodial account. A custodian is an independent third party separate from the employer who holds the funds for the employee. Typically this is a 401K plan provider. It does not protect your account value from decreasing. The Act does not protect an employee from the reality of bankruptcy court.
Anyone who is enrolled in a corporate 401k plan, within 30 years of retirement, and doesn’t know these basics, probably doesn’t have they’re portfolio properly invested
The reason why so many 401K plans suck is because it is typically your HR department that selects the final plan. Not your CFO or your treasurer, but the person administering your company’s overall benefits who is typically trying to keep costs down for the company as a whole. One easy way to reduce corporate costs – give your employees a crappy 401K plan
Those fees feel like an entrapment. But then, some of us don't really have much of a choice with this matter. After all, it's better to have a retirement plan -- any retirement plan -- than to have none at all.
If you are the plan participant and your employer offers a designated Roth 401(k) program, the employer must also offer a traditional 401(k) plan. As such, you will need to decide which is better for you. Roth 401(k) contributions are usually more suitable for individuals who will be in a higher tax bracket during retirement, as the tax-free growth allows them to avoid higher taxation on their retirement savings.
It’s often difficult for an investor to know the exact breakdown of fees for their 401(k) plan. Even if you know the breakdown, it can be hard to figure out what portion of it is an excess revenue. It may soon change: as lawmakers are closing the loopholes, the plan costs become more transparent, which usually lower fees.
The idea of 401K seems interesting but I will need to more understand it properly before taking my retirement. Anyway, thanks for your post.
I think down the line annuities are the way to go after retiring. With annuities you're making money with what you have, but at the same time it's not much at risk to be lost. I've done a bit of research and for someone who's approaching retirement being involved in a solid investment is the ideal situation.
I know a 401k consultant in Idaho. Who actually advice me to not invest in 401K plan as part of your retirement planning. You're right here. 401K is definitely costly plan compared to other retirement options. According to her, it is for highly compensated employees (HCE), Kim from hgh
401K plan is a way to go but there are always other ways to just backup this plan. I've read about this 401k and from my point of vue it's one of the best approaches.
Regards, Gaz
The worst time to stop contributing to your 401(k) is when the market is down. You want to keep adding to your investments (and buy more if you can) while they’re selling at a discount. Lower prices mean you can buy more shares with the same contribution. This lowers your average cost basis and sets you up for bigger returns when the market recovers (and trust me, it will recover).
The best financial advise is usually the pay by the hour option but most 401k plans have trouble implementing this system. It is true many investors don't even realize the excessive fees coming out of their accounts. If they dont want to pay attention to it have your tax advisor take a look for you every during tax season.
Do not withdraw from your 401(k) before retirement. If you take a loan from your 401(k) and can't pay it back on time, it will be treated as an early withdrawal, meaning you will have to pay taxes and 10% penalty. Even if you are able to repay it punctually, it's still a bad idea because you reduce the possibility of compound investment earnings by doing that.
A tax-deferred 401k plan is the traditional type of 401k program. Employers set up the plan and pay the administration costs for employees to have a retirement investment account. The employer works with the plan administrator to offer a variety of investment options suitable to the different investment objectives of employees. The contributions that employees make are pre-tax funds, taken directly from monthly income. The assets accumulate with no annual tax consequence. When the funds are distributed after age 59 1/2, the distribution amounts are added to ordinary income and taxed accordingly.
Although you may be eager to leave the office and tap your nest egg, you can do yourself a huge favor by postponing your retirement a bit. Even just a few years of postponement can add quite a bit to your 401(k), which is simply the result of having more time to contribute. Late retirement can also save you money on other things. For example, most corporate health plans cover you until you are 65, so if you retire before that, you will probably have to spend extra money for an individual health plan until Medicare kicks in (at age 65). Plus, working longer will also boost your Social Security checks.
401k retirement plans give employees a range of choices as to how their assets are invested. An individual that knows he or she does not have a high tolerance for risk could opt for a higher asset allocation in low-risk investments such as short-term bonds; likewise, a young professional interested in building long-term wealth could place a heavier emphasis on equities.
I know that I really want to have around me people who understand such issues like the ones mentioned by you in this post. really up level thinking,
I am just starting my own business, and the world of taxes and 401 allowances is going to be important