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Dear Boss: Fix Our 401(k)

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Social Security's not working. Pensions are practically extinct. Now 401(k)s are in jeopardy -- and it's up to us to save our retirement. Our special report shows you how.

Unhappy with your 401(k) plan? We Fools can relate. Until recently, our employer-sponsored retirement plan was best described as "suboptimal," and even that is a generous assessment: It had lousy investment options (just a handful of funds chosen with little regard for their long-term success or costs), insufficient communication with participants, and little -- if any -- oversight of the investment choices.

That's right, The Motley Fool, Inc. -- the champion of investment industry reform; the scourge of high-fee financial services providers -- had a downright crummy 401(k) plan. (No, the irony is not lost on us.)

Today, our 401(k) bears little resemblance to its predecessor. We now have a broad range of investment options of every size and style (including index mutual funds at rock-bottom expense ratios), a cost-effective side brokerage option for those who want to invest in individual stocks or choose other funds, and ongoing education from the plan sponsor (BB&T), which also meets regularly with our 401(k) committee to report on all the investment choices, going so far as to red-flag funds that have lost their luster.

Not to brag, but how does your company 401(k) compare?

Why your 401(k) plan's a stinker
Sadly, poor plans are the norm. Many companies -- particularly small ones -- get stuck with suboptimal 401(k) plans because the providers selling them are quite good at convincing buyers that they are (a) getting a great deal and/or (b) don't qualify for plans with better terms.

The trend will continue if people like you -- and us -- don't agitate for better choices.

As our company learned last year, there is no need to settle. If your company's 401(k) more closely resembles the pre-makeover Fool one, then you're in the right place. Here's how to get your company to fix your 401(k) plan.

30 minutes to a much, much richer retirement
Getting the powers-that-be to provide better investment options, or an entirely different plan, requires some research, tact, and The Letter That Will Change Your Retirement For the Better. Don't worry, we've taken the liberty of pre-penning most of it for you. But first, you'll need to do a little research to fill in a few key comparisons.

Fodder for your letter will come from your plan's Summary Annual Report, Summary Plan Description, and/or Fee Arrangement. Request a copy from your company's 401(k) plan point person. (It may be someone in your human resources department, or even the company CEO or CFO if you work for a smaller outfit.)

Buried in these documents is the dirt on the fees your plan charges -- both the investment expenses and the plan expenses -- and whether your boss covers administrative costs or if they are passed through to plan participants (that's you). (See "The Secret Downside of Your 401(k)" for a step-by-step explanation of how to analyze your retirement plan's expenses.) 

"In a half hour, you can figure out what your expenses are," says Stop the 401(k) Rip-off! author and retirement-plan industry veteran Dave Loeper. "If you find out that you are getting ripped off, the next step is to complain to your employer without sounding like a complainer."

How to pen your "Dear Boss" letter
Since this topic can be touchy, your aim is to inform, not complain, Loeper says. Don't focus on the needlessly high expenses you're paying. Instead, note that you have calculated the expenses you're paying and are wondering if there are some lower-cost alternatives available. Judiciousness should be your default mode. You've got to convince your company that, in dollars-and-cents terms as well as employee-satisfaction terms, something needs to change.

To strike that perfect balance of selfless concern/"I mean business," keep the following in mind:

  • Don't assume that the folks in charge of picking the 401(k) plan are aware of the expenses, since the revenue-sharing kickbacks and pass-through costs are often not clearly disclosed.
  • Be aware that because of the work involved in creating the plan, they may be a little defensive about your message. So don't go in with an attack mode.
  • Since most human resources professionals don't happen to be investment experts as well, they may also be unaware that there are lower-cost alternatives. And even the most vigilant comparison shoppers can easily fall victim to the industry's slick sales pitches and intentionally confusing fee structures.
  • And, finally, give the benefit of the doubt: Remember that the person or people in charge of the plan at your company are likely doing the best they can with the time, resources, and expertise available.

Address the note solely from you to the person at your company who has the most decision-making power over the plan. If your message is met with resistance, gently point out that a lousy plan robs everyone's retirement savings, not just yours. (We've given you some convincing calculations to present in just a moment.)

If you still don't see any action being taken to improve the plan, you'll have to recruit a few other folks -- via water cooler, Facebook, or whatever means -- to explain the cost of a lousy plan and have them also make inquiries with the powers that be. Heck, let them cheat off your homework and use the letter you pen.

The Letter That Will Change Your Retirement for the Better
We've composed a customizable letter for you to copy/paste/revise and send to your human resources department. It is based on some of the sample letters in Loeper's excellent Stop the 401(k) Rip-off!, as well as our own research and creative-writing class notes. We hope that this letter will get the proverbial ball rolling.

Dear [Benefits Director],

Thank you for providing the information I requested about our 401(k) plan. It helped clarify many things for me in my retirement planning efforts.

While researching my personal situation, I made a few findings that I want to share with you. One of the main things I discovered during this checkup was how much we pay in fees -- fees associated with the actual investments within the plan, and fees that we pay for administrative expenses. [Note: If your company covers administrative expenses and does not pass them through to employees, then delete the reference to "administrative expenses."] These fees greatly hinder the growth that I can hope to achieve with my retirement contributions over the long term.

For example, the funds I previously selected have annual expenses of __%. However, these same funds (or ones that perform nearly identically to them) can be had for much less, ranging from __% to __%. [Note: You can compare fund fees by putting your fund's ticker symbol into Morningstar.com. Ideally you'll pay no more than 1% in fees for any option -- less than 1% is ideal and attainable.] Including these lower-cost fund options in our plan could make a profound difference to our returns.

I also researched the administrative fees that all of us pay. According to our plan documents, we pay roughly __% to cover plan expenses. [Review your plan for buried administrative costs, such as wrap fees, mortality and expense charges, investment advisory fees, record-keeping fees, per-head charges, fee-based brokerage charges, and surrender charges.] According to The Motley Fool website, which has extensively researched 401(k) industry practices, administrative expenses should be less than 1% and ideally less than 0.75% -- an achievable number even for small companies with not many assets in the plan.

The real bottom line is how small improvements in our plan can pay off big-time. A 2006 report by the Government Accountability Office compared the difference between paying 1.5% in fees versus 0.5%. It started with someone with a 401(k) account balance of $20,000 and assumed the investment grew by 7% each year. The person paying 0.5% in fees would have about $70,500 in 20 years. The same portfolio -- same time horizon, starting amount, and returns -- but paying 1.5% in fees (just 1 percentage point more) cuts the retirement balance over 20 years to just $58,400, a 17% reduction.

My 401(k) is one of the most important sources for my future financial security. I just wanted to call your attention to these fees since such expenses affect not just my future retirement savings, but those of everyone here who participates in our 401(k) plan.

Ultimately I hope that you might be able to find a way to offer some lower-expense investment alternatives in our plan [or insert whatever specific action you seek].

Thank you for your attention to this matter.

Very truly yours,

Your Name Here

Everything you ever wanted to know about 401(k)s, but were afraid to ask, is available in our special report.

Dayana Yochim was dazzled by the Fool 401(k) plan's head-to-toe makeover. She now hearts her 401(k). The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 24, 2008, at 4:39 PM, Sapientoni wrote:

    My complaint about "our" 401K involves the lack of a money market account to bail into if the individual suspects a market dive. Even our Smith-Barney Steady Income fund was showing a loss before the big dive. What the h___is up with that? I have complained to our dedicated plan administrator but got the shield and coat of armor excuses that don't wash when hung out with the long term evaluations of Yahoo or MSN Money projections. It smells of kickback to me and most of the others I have spoken to.

  • Report this Comment On December 24, 2008, at 4:46 PM, Sapientoni wrote:

    And furthermore, I was reared on the "set it, and forget it" investment advice of the past. Adhering to that training cost me about $120,000 in this downturn. Money in the confines of the company 401K was helplessly stranded. I just hope it can be recovered before I retire in 4-7 years. I hope to avoid that mistake again. I will try to "take profits" and then jump in and out judiciously as the market moves.

  • Report this Comment On February 17, 2009, at 12:49 AM, smithf wrote:

    BB&T bank and Mark Wenick are the people that cheated me out of my 401-K money. They moved my money without my permision. BB&T Bank cheats workers that save for retirement. The money move of my 401-K cost me about $90,000. BB&T and Mark Wenick are crooks.

  • Report this Comment On September 18, 2012, at 6:21 PM, SharpNJ104 wrote:

    Interesting and timely article. My spouse recently changed jobs and just was eligible to start the 401 contributions this summer. The fees on the individual investments are 1.3% on average! As always, it will depend on how much the powers that be listen and understand.

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Dayana Yochim
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