Tuesday, January 19, 2016

Oh Snap, 401K

By Greg Wright
Certified Fraud Examiner
Certified Financial Planner™

"401(K)s are a great way to save for retirement?"  Sometimes.  "Taxes deferred are taxes saved?"  Not always!

401(K) expenses may offset investment gains.

Employees are suing their employers because of high fees. 

Here’s a short list of employers being sued: Anthem, Cigna, Caterpillar, British Petroleum, Boeing, Wal-mart, New York Life.

The courts may be interested; but, the regulators appear to be less interested – especially in the smaller plans.  Smaller employers have even higher fees than the big boys.  Your boss’s BFF may pay his BMW lease because of your retirement account. 

Groucho tells the story when he went to Bloomingdales department store and stole a printing press.  He was caught on the way out, and the store manager threatened to have him arrested. Bloomingdale himself told the store manager, “All the kids in this neighborhood steal. Let him go.” So Groucho went home scot-free.  The same thing happens to small 401(K) plan sponsors.  Probably less fiduciary behavior; few are investigated and fined. 

The dirty little secret is that employees pay almost all the 401K expenses.  Many plans are designed so that the company pays very little except for a “standard” plan document.  Since it is a fill-in-the-blanks plan document in the salesman's laptop, there is little or no fee.  Here are some 401(K) costs.  How much are you and your fellow-employees paying for these expenses? 

·                Investment advisor fees for managing the fund’s portfolios
·                Marketing fees
·                Shareholder service fees
·                Custodial expenses
·                Legal expenses
·                Accounting expenses
·                Sub-accounting fees
·                Transfer agent expenses
·                Brokerage Commissions
·                Sales loads
·                Redemption fee
·                Exchange fee
·                Account fee
·                Purchase fee
·                Maintenance fee
·                Plan set-up
·                Portfolio management fees
·                Educational materials and services expenses
·                Record keeping services
·                Employee enrollment services
·                Customer service
·                Legal advice to employer
·                Compliance testing expenses & audits
·                Fees for additional features or services – e.g. investment seminars, investment advice, loan fee

This chart from Brightscope illustrates 401(K) costs by size of the plan.  If your expenses are above one or two percent, you are probably paying too much. 

The 401(K) guy (increasingly a gal) that shows up to answer questions and give an “investment” training lecture must be paid.  

Can we talk about 401(K) investment returns?  Please.  

You did know that few plans do better than broad market indexes?  In a good year, maybe 25% beat the Dow – before plan expenses.  According to some sources, not one 401(K) asset manager has been better than the Dow or S&P 500 for four consecutive years.  One writer said that a monkey throwing darts at the newspaper stock page would do better than most.

Even if the employer has some sort of match, after expenses, vesting and poor performance, your returns may be negative.  Does the employer match go the same place your money goes?

Does your company plan suck?  High expenses, low returns, The rep shows up in a BMW, pals with the boss and lives large. 

If your company 401(K) sucks, you may not want to sue your employer.  Yes, it could be career limiting.  Some are quietly going another direction.  Here is a partial list of 401(K) alternatives from a recent US News & World Report:
  • Use a taxable investment account. 
  • Automatic deposit to an annuity or bank savings account. 
  • Consider the myRA. 
  • Set up direct deposit for your tax refund.