What is Your 401k Provider Not Telling You?
December 9, 2006
The largest percentage of my family’s portfolio by far is in my 401k plan. So when I ran across “10 Things your 401k Provider Won’t Tell You” in this month’s edition of Smart Money magazine I took notice. Below are the things I took from the article and after each, questions we can ask our HR department on Monday morning.
Getting Fat With Us
Some 401k providers charge their administrative fees as a percentage of assets instead of a fixed cost. The administrative costs don’t really increase as the value of our investments do but the administrator keeps taking a cut of our earnings to do the same amount of work.
How are the administrative fees on my 401k charged, as a fixed cost or as a percentage of assets? If a percentage of assets, why and how can we change that?
Are they Using Pricing Power?
When you buy a mutual fund right from an investment company you typically buy investor shares. If the asset manager has enough holdings the company can often buy the same funds at an institutional level. The key is that fund fees should be lower at institutional level.
For example, the Vanguard 500 Index Fund offers Admiral Shares (VFIAX) and Investor Shares (VFINX). The current expense ratio on the Admiral Shares is .09% while the cost for the investor shares is twice that, .18%. Over the course of 30-40 years, this difference can really add up.
Does the 401k administrator buy investor shares or institutional shares? If they are investor, how come?
Diversify at Your Own Risk
Some administrators offer good funds for one or two categories but fall short in others. For example, they may have a great small cap fund but their international or bond funds stink. We all know one of the key pillars to successful investing is diversification. However, if the funds available in our 401k don’t offer well performing / low cost options across all categories what are we supposed to do?
I consider myself lucky; my plan actually offers good investments across the different categories. If yours doesn’t, call up HR and ask for funds you’d like to see added. Then call them back every day until they listen!
Don’t Put all Your Eggs in One Basket
According to the article one of the most popular investments in a 401k is company stock. Remember Enron? Your company already pays your salary and benefits, if it goes down in flames don’t let it take your retirement money with it as well.
This one is an action instead of a question. If the majority of your 401k holding are in company stock, diversify this week!
Roth 401k
I’ve been socking away a lot of money into my 401k over the last few years. Since I have such a long time frame until retirement and have no idea what tax rates will be like 40 years from now, I’d like to change over to a Roth 401k. The Pension Protection Act made the Roth 401(k) a permanent investment tool but many retirement plans don’t offer it, mine included.
This article talks about why many companies have been hesitant to offer the Roth 401k but the Smart Money article brings up a good point:
“Remember that a 401(k) plan is about having the most money possible in your pocket during retirement. If your plan doesn’t include the Roth and you think it’s the best option for attaining your goal, ask your benefits department why and what steps employees like you can take to get one. The logistics are their problem.”
How come a Roth 401k isn’t offered now? When will it be available? What needs to happen to put one in place? Don’t make me call the CEO!
All posts by Ben Edwards
Definitely sign up for a Roth IRA.
Earnings grow tax-fee. It’s all about the earnings, baby!