401(k), is it the best way?

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Be careful of 401(k) fees, advises SEC

Benefits Pro on February 24, 2014

The Securities and Exchange Commission issued a bulletin warning investors to be aware of just how much fees they are charged on investments, including those levied on 401(k)s and other retirement vehicles, could cost them.
 
Transparency in 401(k) fees has been a major topic for more than a year. As more light has been shed on them, some plan sponsors have been able to get them lowered, but overall disclosure rules have had little effect on participants’ knowledge of them.
 
The SEC noted that an investor starting out with $100,000 would pay $28,000 over 20 years on an assumed rate of return of 4 percent if they paid an annual fee of 1 percent. That $28,000 could have generated another $12,000 if it had been invested, leaving a $40,000 hole. Considering the low retirement savings rate among U.S. workers, a loss of that size would not be insignificant for many.
 
The two types of fees normally eating away at portfolios are those for transactions, paid each time a stock is bought or sold, and ongoing fees, such as an annual maintenance fee that is more applicable to retirement plans. 
Participants in 401(k) plans often get hit two ways. First, they pay to cover the annual operating expense of the plan and they also are charged for the expenses associated with the mutual funds they hold.
 
Either way, the SEC advised, investors need to be aware of them and take action to reduce them as much as possible. 
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Warning: 4 Signs Your 401(k) Is Being Shortchanged

by KIRSTEN KLAHN
APRIL 12, 2014

Source: Thinkstock

 
There shouldn’t be anything confusing when it comes to your 401(k). It should be clear to you how much you’re contributing, the rate of return, and any fees that are being charged to your account. There is a chance, however, that you’re being shortchanged by your employer. It’s a scary thought, but also one that sometimes proves to be accurate. According to an AARP article, a report from the Department of Labor showed nearly 73 percent of the plans it audited last year made the wrong employer match or some other error.
 
Your retirement money isn’t something you want to take lightly, which is why it’s important to know the warning signs that should alert you to a possible problem with your 401(k).
 

1. You’re either receiving your plan statements and documents late, or not at all
 

Everything that has to do with your 401(k) should be well-documented and arrive on time. You should also have access to a “Summary Plan Description” that describes your plan’s features, writes Forbes. The Department of Labor suggests reviewing the following documents:

• Your individual benefit statements. These should arrive for your review once a quarter. It should detail how much you’re investing, how your money is invested, as well as your account balance. Take a few minutes each quarter to look at it closely.
• Investment information. The statement should include your investment options, as well as a chart that breaks down any fees associated with your account.
• Underfunding notices. If you are in a defined-benefit or traditional benefit plan, you have a right to know how much your plan is underfunded.
• Plan changes. Your employer must tell you if there are any changes made to the retirement program.

Source: Thinkstock

2. Sometimes, you’re not sure where your contributions are 

“These days, transfers from your payroll to a retirement account shouldn’t take long. If they are taking a week or more, you should alert your plan administrator,” Forbes writes. Talk to them about how your transfers can be expedited, because there’s no good reason it should be take time for your contributions to appear in your plan.


Source: Thinkstock

3. Your employer may not want what’s best for you 


First, remember that you have some rights under the Employee Retirement Income Security Act, which is the federal law governing retirement plans. Now, ask yourself this: Has your employer refused to give you a broad selection of passively managed index funds? Is your employer sitting on payroll deductions before depositing them? If your answer to either of those was yes, you have a problem. Or, maybe something else is occurring that is giving you a suspicious feeling about how your 401(k) is being run.
 
In any event, consider reaching out to the Department of Labor, or even think about running it by an attorney. By agreeing to provide you with a retirement plan, your employer has a set of rules it needs to follow, and you have every right to ensure that they are.



Source: Thinkstock

4. You don’t understand the fees 

You have every right to fully understand what your 401(k) is costing you — and there is usually a price. There are going to be middlemen expenses, such as administration fees or others labeled as “revenue sharing.” These fees are deducted from your account. Don’t just accept that, though, without knowing exactly what they’re for. It should be easy to look up if your employer is giving you all of the proper documents. According to Forbes, every employer is required to give you a statement explaining your account fees. You also have a right to know how fees compare to other plans that are similar to yours. Some employers will do a comparative study or hire an independent fiduciary to shop for lower cost plans. If they aren’t making an effort to do that, you have the right to request that they do.
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When You Should Flee Your 401(k)

John Wasik, Contributor  - http://www.forbes.com/sites/johnwasik/2015/05/04/when-you-should-flee-your-401k

 

There are times when you should flee your 401(k) for greener pastures.

As readers of this blog know, I’m not a big fan of 401(k)s. They are often overpriced ways to enrich middlemen and brokers and inadequate retirement savings vehicles.

So when I saw a recent video by James Altucher saying that you should just bail from your 401(k), I was intrigued. Unfortunately, his core advice is incomplete and a bit dogmatic.

While I agree that you should always be investing in yourself — meaning education, training and new skills — that doesn’t mean you should completely abandon a 401(k) as a savings vehicle.

Some employers are interested in doing the right thing for their employees and are making moves to improve their 401(k) plans.

Sadly, though, most employers are behind the eight ball on making their 401(k)s viable savings plans.
Keep in mind that 401(k)s were obscure little fringe benefits in the U.S. tax code that became mainstream retirement plans, which they were never designed to do.

Employers embraced 401(k)s to the tune of more than $4 trillion since they were cheaper to run, didn’t require employer contributions and could replace costly defined-benefit plans, which guaranteed pension payments for life.

In the 401(k) world, everything is optional. Employers don’t even need to offer them; about half of employers don’t even bother.

So here are some solid reasons to bolt a 401(k) plan that your employer refuses to improve.*

1) There’s no match.

I’m always in favor of taking the free money on the table. Hey, it’s cash that you don’t have to work for and all you have to do is contribute up to the amount of your employer’s matching contribution. You get 100% return on that investment.

Nearly half of employers don’t offer a match, so that’s a reason to go elsewhere, especially if the plan don’t do the following basics…

2) The fund selection is poor.

I’m not picky when it comes to fund selection, because it’s a no-brainer. At the very least, your employer should offer index funds that cover all U.S. and international stocks and bonds.

That’s basically four funds, priced at 0.20% annually — or less. That way you’re buying most of the important global markets.

What makes fund selection poor? Either they only offer actively managed funds or just concentrate on U.S.-based funds. You need international diversification to stay in the game.

3) The funds are overpriced.

What drives me nuts is when middlemen make more money than employees in 401(k) plans.

I would flee from a plan that only has broker-sold or managed mutual funds and charges obnoxious expenses like wrap fees, 12b-1s, commissions or does revenue sharing.

All of these additional fees eat into your retirement savings and are completely unnecessary.
 
* Now for the fun part. You can stay in your plan if your employer revamps your plan.

You can lobby your employer to improve your plan by doing an independent fiduciary audit to see how it can be improved. If they don’t take this step, you can sue them. There are about a half-dozen lawsuits winding through the federal court system that employees are winning. Here’s a law firm that may even take your case.

Litigation, though, is difficult and lengthy. It may be years before a settlement or decision is reached. In the interim, just get together with some like-minded employees to demand an audit.

You can easily reduce costs and diversify fund choices by going to exchange-traded funds. Schwab and Sharebuilder offer these kinds of plans.

In any case, do your homework, ask questions and demand action. While it’s easy to flee a 401(k) and set up your own individual retirement account (IRA), see what you can do with your employer first. It may be a more expedient way to improving your retirement security.

John Wasik is the author of “Keynes’s Way to Wealth” and 13 other books. He writes and speaks about investing across the globe.

 

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