The Cost of Your 401k Plan After Retirement
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)
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, bu rather by you and the other participants, they 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.
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Tags: 401k plan, 401k plan fees
January 16th, 2009 at 6:51 pm
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March 8th, 2009 at 8:38 pm
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.
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June 14th, 2009 at 3:02 pm
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.
July 2nd, 2009 at 4:28 am
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.
July 18th, 2009 at 8:12 am
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.
July 19th, 2009 at 4:23 pm
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!
July 23rd, 2009 at 1:15 pm
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.
July 27th, 2009 at 2:08 am
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.
August 9th, 2009 at 2:14 pm
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.
August 15th, 2009 at 8:23 am
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.
August 29th, 2009 at 11:45 am
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.
August 30th, 2009 at 2:40 pm
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.
September 6th, 2009 at 4:10 pm
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
October 5th, 2009 at 5:02 am
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.
October 22nd, 2009 at 7:02 am
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.
October 30th, 2009 at 1:17 pm
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.
November 10th, 2009 at 6:55 pm
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.
November 15th, 2009 at 10:05 am
small business 401k, self employed retirement plans, small business retirement plans and QuickBooks 401k plans are good financial plans.
February 7th, 2010 at 9:01 am
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..