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Today's tip is part of our Fiscal Fitness '09 series. Every weekday this month, you'll get help getting fiscally fit as we work toward our goal of saving $2,000 to invest in 3 stocks!
It's one thing to lose money in your retirement account due to stock market fluctuations. It's quite another for your savings to be decimated by administrative fees.
Not that we expect a free pass on all account services rendered. But at least we want to know how much we're paying and for what. But good luck finding that out if you're money's in an employer-sponsored retirement plan, such as 401(k)s (and their 403(b)s and 457 versions).
Tucked away in your 401(k) plan's fine print under headings like "Summary Annual Report" or "Summary Plan Description" or "Fee Arrangement" are the true costs of investing your money in your employer-sponsored plan.
Add those plan costs to the mutual fund fees you're paying on the investments within the plan, and in the irony of all ironies, even if your 401(k) returns are flat, you're still going to lose money on your investment.
Is your retirement plan picking your pocket?
Given that 401(k)s are the primary retirement savings vehicles for the average American -- where the bulk of most of our long-term savings reside -- it's critical to know if you're over-paying on your account.
There are expenses, and there are other expenses. What's the difference? The fees that are readily disclosed to plan participants are those related to the investments. Those expenses are plainly spelled out on your account statement or plan website, typically reflected as a fund's expense ratio.
It's clear that employers that are struggling to make ends meet aren't making your retirement a priority. A few years back, companies like IBM (NYSE: IBM ) , Verizon (NYSE: VZ ) , and Hewlett-Packard (NYSE: HPQ ) started freezing traditional pension programs for employees. More recently, a number of large employers, including General Motors (NYSE: GM ) , FedEx (NYSE: FDX ) , and Sears Holdings (Nasdaq: SHLD ) , have suspended employer matching contributions on 401(k)s.
Costs associated with the administrative upkeep of your plan -- those "other" expenses -- are not required to be broadcast to you and your co-workers thanks to a disclosure that is on your statement that goes something like this: "All returns reflect investment expenses but not plan expenses." In other words, "We're taking money out of your account regularly to pay for the administrative costs of this plan. Have a nice day."
The 5-figure 401(k) service fee
In Stop the 401(k) Rip-Off, author David Loeper tells his own tale of getting ripped off by his (former) company-sponsored retirement plan. Looking in the plan's Summary Annual Report, under the "Basic Financial Statement" section, Loeper discovered $11,304 in additional expenses.
Dividing that amount by the total value of plan assets ($1,341,870), he calculated that his plan has an additional 0.84% in fees. After adding that to the expense ratios of his funds, he discovered that he was paying 1.30% a year to be mostly in index-based investments.
Even on a $20,000 401(k) balance, that extra 0.84% means paying $168 extra in fees in one year. Over time, that can cost even more, because every dollar that is pulled out to cover investment fees robs you of the chance to be re-invested and compound over time.
If you have money sitting in a former employer's 401(k) plan, the fix for fee decimation is simple: Move your money to a rollover IRA and stop paying your ex co-workers' retirement plan fees.
Rolling your money over is simple: Contact the institution that will receive your assets (a low-cost discount brokerage is your best bet), contact the institution that will transfer your assets, fill out the transfer paperwork and relax while until the money is moved from one account into the other. (Here are more details on how this rollover IRA process works.)
Once your money is moved, you can continue to invest in mutual funds (perhaps the same ones you had in the plan, or you can find better ones), or buy stocks, bonds, or ETFs directly.
If you're paying high fees in your current plan, you have several options:
- Choose index funds instead of actively-managed mutual funds: If your plan offers index mutual funds, they usually (but not always -- so check!) have lower expense ratios. Vanguard's 500 Index Fund or an index ETF like SPDR Trust (AMEX: SPY ) both offer low fees. If your actively managed choices haven't been trouncing the indexes, then you're doubly better off moving your money into an index.
- Buy stocks instead of funds: Some plans offer a "brokerage window" that allows participants to buy stocks instead of mutual funds, thus avoiding at least the fund expense fees. Look into the brokerage's pricing since this may be a more cost-effective way to invest.
- Roll the money into an IRA early: Some plans allow for "in-service distributions" which allow employees to roll their vested balance into an IRA while still working at the company. Again, moving it into the IRA (so you do not trigger early withdrawal fees or taxes) could save you money.
- Convince your boss that you need a better plan: Compose a "Dear Boss: Fix Our 401(k)" letter to point out any excessive fees to what your human resources department or benefits committee likely doesn't even realize your company is paying. Click that link for a step-by-step game plan on getting better choices for you and your co-workers.
More ways to save ...
- Maximize your growth and minimize your risk: Just because your 401(k) money is in one place doesn't mean you can gloss over asset allocation rules. A good allocation strategy is a must. Take just 20 minutes right now to read this quick guide to retirement success.
- Only tap your 401(k) for a loan as a last resort: Your retirement account is just that -- money earmarked for retirement. Not for a kitchen remodel. Not for Junior's orthodontia. That's why we call borrowing from the money you put in is "the worst idea ever." You'll pay big (a 10% early withdrawal penalty and income taxes to boot) to get your mitts on the money early if not for a "qualified expense." If you're in the 25% tax bracket, taking $10,000 out of your plan would cost you an extra $3,500 in taxes and penalties. And every day that you don't pay it back to your future self, you miss out on any investment gains you might have -- a double whammy since money that's not there can't compound over time. So, save yourself thousands and don't borrow from your 401(k).
Keep your girlish financial figure all year long
Want a whole year's worth of money-toning, net-worth-strengthening advice? Check out Rule Your Retirement, where 2009 is the Year of Fiscal Fitness. Do everything you can now to create the best retirement plan possible.
Read the latest from Fiscal Fitness '09: 1 Month, 2 Grand, 3 Stocks to get our other money-saving tips. You can also keep up with our tips through our daily Foolwatch email. Share your frugal insights and experiences through our Fiscal Fitness '09 discussion board, or leave a comment below.