By Greg Wright
MBA, CFE, CFP®, CLU, ChFC
Certified Fraud Examiner
Certified Financial Planner™
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
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·
Marketing fees
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·
Shareholder
service fees
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·
Custodial
expenses
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·
Legal expenses
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·
Accounting
expenses
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Sub-accounting
fees
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·
Transfer agent
expenses
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·
Brokerage
Commissions
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·
Sales loads
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·
Redemption fee
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·
Exchange fee
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·
Account fee
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·
Purchase fee
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·
Plan set-up
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·
Educational
materials and services expenses
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·
Record keeping
services
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·
Employee
enrollment services
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·
Customer service
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·
Legal advice to
employer
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·
Compliance
testing expenses & audits
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·
Fees for
additional features or services – e.g. investment seminars, investment
advice, loan fee
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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:
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