The Employee Retirement Income Security Act (ERISA) of 1974 started the 401(k).
Originally intended by Congress as an additional way to compensate company executives, ERISA had the unintended consequence of killing-off private sector pensions.
Nowadays, it’s the private sector employee’s responsibility to fend for yourself, using a 401(k), instead of getting a pension.
This is both a good and a bad development.
It’s great that you can now save in a 401(k) each paycheck, and get a match, but we’ve found that employees aren’t getting the education they need on just how important maximizing their 401(k) plan is.
Most employees aren’t told how much they should save.
Many employees don’t know if they have a match.
Participants usually don’t know that the target date funds in their plan can have a lot of bonds in them (which aren’t truly safe investments).
401(k) plans offer you stocks, bonds, or cash.
The stocks funds can be a great option when you’re young, but as you get closer to retirement, the 401(k) plan options fit you more & more poorly.
Also, since hidden 401(k) plan fees are assessed by size of account balance, older workers tend to pay the freight for the newly-hired younger workers.
Most employers establish a 401(k) to attract younger workers, not older workers.
When the stock market is high, most 401(k) plan participants close to retirement don’t recognize the amount of risk they’re taking in their 401(k) plan.
Could you survive another 2008-style crash in your 401(k) plan? Losing 50% or more?
Beyond stock market risk, we regularly meet with someone nearing retirement, and they tell us that their 401(k) plan “doesn’t have any fees.”
Or, that “the only fees” they pay “are for the mutual funds” in the plan.
What most participants don’t know, and never see, is their 401(k) plan’s Form 404(a)5 filing.
There’s a reason you’ve likely never seen it, and if you’ve have ever seen it, you’ve never read it: It can be 100 pages long, and there’s no set format saying on which page the plan has to list the plan fees.
Now, we have a 401(k) plan for our employees, and I set it up myself.
Still, me knowing what I’m doing, and shopping-around, the lowest I could get our 401(k) plan fees was 0.40% per year.
Whereas most employers don’t know what to look for, so their employees typically pay 1% to 1-1/2% per year in hidden fees in their 401(k).
Yes, a 401(k) is a great employee benefit, but the hidden fees have to be kept in-check.
I think that 0.40% per year is reasonable, but that 1% to 1-1/2% per year certainly is not.
Added to all this is that the average 401(k) plan in America only offers participants 20 mutual funds to choose from.
And oftentimes, the mutual funds offered are poorly selected.
Sometimes the mutual funds in the 401(k) plan have high fees themselves.
We’ve seen folks waste another 1% or so per year here alone.
So, for some, they’re wasting a total of 2-1/2% per year on 401(k) plan fees.
Still, we love the idea of using your 401(k) plan as a systematic savings vehicle.
However, in most cases, each time you leave a job, you should roll your 401(k) balance to an IRA.
And, in most cases, if your plan offers you a Roth 401(k) plan, you should be using it.
Something that almost no one knows: Most 401(k) plans in America offer current employees who’ve reached age 59-1/2 the option to roll their 401(k) balance to an IRA, while you still work there, and you get to continue to contribute new money, and get the match.
This can be a huge opportunity to reduce your fees, and to get a much broader choice of low-cost investment options.
This varies by plan, so give us a call to see if this is possible in your 401(k) plan. We’d love to help.