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The Secret Downside of Your 401(k)

John Rosevear
December 17, 2008

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.

This might come as a shock to you: Your 401(k) might not be the best place to keep your money.

I know, that sounds like crazy talk -- or at the very least, a rather contrarian observation. But bear with me.

I'll be the first one to admit -- heck, I say it all the time -- that the 401(k) plan and its 403(b) and 457 cousins are fantastic vehicles for retirement savings. And you should be contributing to yours -- at least enough to get the full amount of your employer's match.

But after that, and when it comes to the balances you've left behind at past employers, it might be time for you to get acquainted with another good friend of mine: Mr. IRA.

Why? Because workplace savings plans can be expensive.

Wait. I don't pay any fees, do I?
You almost certainly do -- possibly as much as 1.5% of your holdings every year, maybe more. First and foremost, if your plan includes mutual funds, you're paying management fees and other expenses. Look at the fees on these retirement-plan stalwarts:


Sample key holdings

Expense ratio*

Dodge & Cox Income Fund (DODIX)

Bonds from Fannie Mae (NYSE: FNM  ) and Ford (NYSE: F  )


Third Avenue Value (TAVFX)

POSCO (NYSE: PKX  ) , Nabors (NYSE: NBR  )


Fidelity Diversified International (FDIVX)

Vodafone (NYSE: VOD  ) , Siemens (NYSE: SI  )


 Source: Morningstar. *Percentage of fund assets paid for fees and expenses every year.

Index funds will have lower expense ratios, of course -- but even the expense ratios listed above may not reflect what your plan is actually paying. Those ratios don't capture all of the fund's actual expenses -- things like the commissions the fund pays on its trades are left out. Moreover, the fund company may be charging your plan for extra administrative costs.

But won't I pay most of that anyway if I hold the fund in an IRA?
Sure. But with an IRA, you could choose to hold some of those stocks or bonds directly instead, paying nothing but the cost of the trades. And it may be worth it to do so: 1% may not sound like much, but it makes a big difference in your results when it's compounded over many years.

How can I find out how much those other expenses are?
First, find