Saturday, July 16, 2016

Your 401K has no clothes

If you work for a living, and if you don't work for the government, then you are probably depending on your 401K to provide a substantial majority of your retirement.

If you are that person (and most of us are), please please PLEASE go read this wonderful article by Kevin Busque: How I’m Fixing Your 401(k)

None of the information he shares is new, but I've rarely seen it put so clearly and well.

I became obsessed with researching our plan and the alternatives. I started finding little bits of information here and there — fees that seemed a little out of place and inappropriate; for example, plan asset-based fees and menu fund fees. When you dig into the details and the relationships that outside vendors have with legacy 401(k) providers, it’s clear that the industry has lost focus on the goal, which is to give employees the opportunity to save as much as possible for retirement. You start to notice all of the hands in the cookie jar: TPAs, fiduciaries, recordkeepers, fund managers, broker/dealers, sponsors, custodians, RIAs, and on and on. It’s incredibly confusing

I've been railing about these fees to co-workers, management, and friends for years, at many different companies where I've worked, and I'm surprised how little-known this information is.

If you've been wondering why you save and save and save, and yet your 401K seems to barely grow, even during MASSIVE bull markets like the one that has been present for the last 5 years, the answer is right there in front of you: your company's 401K vendor is taking your earnings for themselves.

Each of those “services” — TPAs, recordkeeping, custodial services, fiduciary services — needs to be compensated, and I wanted to figure out how 401(k) plan providers made their money. Each service can be, and likely is being, compensated via “wrapping fees.” Note: If you see the words “wrapped fees” in a retirement plan, that’s another hand in the cookie jar.

Here’s an example: If you’ve ever looked at a fund expense ratio on Morningstar, Yahoo Finance, etc., you’ve probably noticed a particular number — let’s say 25 basis points. 25 basis points equate to 0.25%. If you bought that same fund in your 401(k) plan, you could easily end up paying an additional 0.75% on top of the fund expense, and your final costs would be 1.0% of your assets in that particular fund. Those are wrapped fees. The national all-in expense ratio for 401(k) plans with less than $1 million in plan assets ranged between 0.68% and 2.66%, paid for by the very people trying to save for retirement

As Busque notes, there's just no reason for all of this complexity and mess:

There’s no magic to retirement investing: You should keep your fees as low as possible, diversify your investments, and keep your asset allocations appropriate for your age and risk tolerance. Re-balance, and think long-term.

Unfortunately, if you work for a living, and if you don't work for the government, you are totally at the mercy of your employer to provide you with a decent 401K plan administrator.

And most employers don't.

Since your only two choices are:

  1. Invest in your company's 401K plan, as it stands
  2. Save for retirement separately, forgoing all the tax-advantaged benefits of a 401K plan
that first choice is really the only viable one, which is why I tell everyone who asks my simple rules:
  1. Put as much money into your 401K plan as you possibly can
  2. Choose the fund(s) with the lowest fees. Don't worry about anything else about the fund selection; just look at the fees. Is there a Vanguard fund in your plan? Choose it, even though your administrator is adding their own rich fees on top of it. It's still the best you can do.
  3. Every time HR asks you what you think about your 401K plan, tell them you are furious about the fees that the 401K plan administrator charges.

Oh, and if you ever change jobs, DON'T leave your money in your employer's 401K, and DON'T roll it over to your new employer's 401K (unless your new employer uses GuideLine).

Instead, roll your money over into your own Rollover IRA, and manage your money yourself, and pay those fees to yourself!

Unfortunately, in many cases HR doesn't care what you think, and has no incentive to choose a better plan administrator.

But at least you can try.

And make sure that everyone you talk to knows about the problem, and knows about efforts such as Busque's at GuideLine.

That's the only way this problem will ever get better, for our children, and their grand-children, and...

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