A few dollars here and there can really start to add up over time, which explains why millions of workers in Arizona and throughout the country are receiving new reports about their 401(k) investments.
Expanded federal disclosure guidelines are giving employees more insights about the fees and expenses they pay on workplace 401(k) retirement accounts, which count 72million participants nationally and rank among the biggest sources of money for a lot of Americans.
Until now, some of those costs have been obscured, making it difficult for workers to figure the drag on their portfolios. The new rules wont clarify everything but are a step in the right direction.
Employers in recent weeks have started to mail out the first of these 401(k) cost statements, and the process will continue. That should give participants a better idea of the ongoing expenses charged by mutual funds and other investments commonly offered through the plans, along with other fees they pay.
There are so many ways for the providers of these benefits to take a slice here and there, and nobody would ever know it, said Brian Cassidy, president of CCBG Architects Inc., a small firm near downtown Phoenix that has a 401(k) retirement benefit for its workers.
Thats where the new rules mandated by the US Department of Labor come in. Theyre designed to make it easier to track 401(k) costs, both for workers and employers. The disclosures arent perfect ? for example, they dont summarize all the costs paid by each worker in a single number. But they illuminate expenses involved, in a standardized format.
It would be nice to know exactly how much money is going out the door, sliding under the crack, said Martin Ball, an architect at CCBG Architects and a participant in the firms 401(k) plan. Im all for disclosure ? I think its only fair.
Many observers contend the rules are long overdue. Since their start roughly three decades ago, 401(k) plans have emerged as arguably the best retirement option still available to the masses. Traditional pensions, where employers assume the responsibility for saving and investing on behalf of their staffs, are being phased out.
Meanwhile, a lot of people dont contribute much to Individual Retirement Accounts. While IRA assets do exceed those of 401(k) plans, a good chunk of the IRA total represents money originally invested in 401(k)s that later got transferred over when workers retired, switched jobs or got laid off. Among households with workplace-retirement coverage, 82percent have 401(k)-style plans and the proportion has been rising, reports the Employee Benefit Research Institute. IRA participation rates have been declining.
The 401(k) cost issue is important because fees and expenses, unlike investment performance, are predictable. Excessive costs can drain a 401(k) account if left unchecked. The Department of Labor uses the following example:
Suppose youre a young worker with 35 years until retirement and currently have $25,000 in your 401(k) account. Suppose, further, that you dont contribute any more money to the 401(k) yet your investments grow by an average yearly rate of 7percent (before fees). If fees and expenses reduced that performance by 0.5percent annually, your account would still grow to about $227,000 at retirement. But if you incurred higher fees of 1.5percent annually, your balance would increase to only $163,000. In other words, a 1percent yearly difference in costs would shave your eventual 401(k) value by 28percent.
Its not uncommon for 401(k) investors to get a raw deal, characterized by high fees, lagging performance and poor service, said Alan Norris of Norris Wealth Management in Phoenix. It adds up to participants not getting the growth of assets that they should, he said.
Putting costs in context
So what are excessive fees? That question is left unanswered by the new regulations, which focus on disclosing high-cost investments, not prohibiting them. The answer also partly depends on the type of investment.
For example, stock mutual funds generally are more costly to run than bond portfolios, while international stock funds tend to carry higher costs than domestic ones. Large funds ? those with hundreds of millions if not billions of dollars in assets ? have greater economies of scale and thus typically are cheaper to run than smaller portfolios. Index funds, which minimize trading and pursue other cost-cutting strategies, have among the leanest expenses.
ShareBuilder 401k, a Seattle firm that provides low-cost retirement plans for small businesses, suggests investors stick with funds charging overall fees of 1percent or lower. In a recent survey, the company found that small-business owners are largely clueless about appropriate costs. About 45percent of the 500 respondents thought average annual fees of 4percent or more were reasonable, with another 16percent not voicing an opinion.
Many workers are even less educated on this issue. As it is, many workers invest too conservatively or aggressively, dont invest enough to take full advantage of employer-provided matching funds and make other mistakes. Theres a danger that many people will ignore the new fee reports when they arrive in the mailbox, discarding them as either junk mail or too confusing.
The fee disclosures arent bad, but I dont know if anyone will understand them, said WR Bud Lundahl of Meyer and Lundahl Manufacturing Co., a Phoenix architectural-woodworking company that offers a 401(k) program to its employees.
In the ShareBuilder 401k survey, two-thirds of small-business owners said they werent fully prepared to answer questions about their retirement plans. Yet companies face legal exposure by not complying with the new requirements.
(Employers) cant just send this information out and cross their fingers, said Joseph Doku of Plan Sponsor Services, a Phoenix firm that helps employers manage their 401(k) plans. You have to be prepared to answer questions and, potentially, justify the expenses.
The new disclosures will be most effective if they prompt employees to review their accounts and ask questions.
It will make an impact if every employee walks into their HR department and asks for help in understanding their 401(k)s and whether or not the fees are reasonable, said Norris, a fiduciary consultant for 401(k) plans at Valley companies including CCBG Architects and Meyer and Lundahl Manufacturing.
While the disclosures are one more thing for workers and employers to learn, many feel the effort is worthwhile.
Its satisfying to know that youre putting something away for when you retire, said Eugene Ramarui, a machine operator and 401(k) participant at Meyer and Lundahl.
These retirement accounts can make a difference, incorporating, as they typically do, matching funds and a reasonably diverse investment lineup while requiring workers to save automatically and gradually through payroll deductions.
One thing thats nice about 401(k) plans is that youre providing something to people who appreciate it, said Lundahl. Many workers, he adds, probably dont have anything else in terms of retirement savings.
401(k) fast facts
Workplace defined-contribution retirement plans, of which 401(k) programs are the main type, allow employees to divert money from their paychecks into investment accounts. Participants dont pay taxes on this money or the earnings they generate until they withdraw money. Employers typically encourage participation by providing matching funds. Workers must make their own decisions by selecting from a range of investment choices.
Roughly 72 million Americans participate in 401(k) and other defined-contribution plans.
Defined-contribution plans count $4.7trillion in assets, making them the second-largest component of the $18.5trillion retirement market after Individual Retirement Accounts. Among DC plans, 401(k) programs count $3.3trillion in assets.
Mutual funds are the dominant type of investment in DC plans, accounting for 61percent of assets. Employees often also can choose from among individual stocks, insurance products and stable-dollar investments.
Source: Investment Company Institute, Employee Benefit Research Institute, US Department of Labor
Making sense of 401(k) fees
New federal guidelines require employers to provide more information about investments in 401(k)-style plans. These can run several pages, but you can find the key information fairly quickly. The disclosures discuss the types of investments offered, including past performance, and fees and expenses.
Figuring fund costs: Mutual funds are the main investments within 401(k) plans, so its important to understand them. All funds summarize expenses as annual operating costs, or expense ratio. In 401(k) fee statements, the figures are expressed both as a percentage and as a dollar charge per $1,000 invested. For example, a fund with 0.65 percent in annual operating costs would show this as an annual charge of $6.50 for each $1,000 invested.
Applying it to your portfolio. Even with the new disclosures, you might need to do some calculations to find out what youre paying. To do this, you first need to look up how much you have invested in various assets (from your account statement), then apply the appropriate expense percentages.
Suppose you have $10,000 of your 401(k) account in a money market fund that charges 0.40 percent annually, plus $30,000 in a stock fund with 0.95percent in annual operating costs and $15,000 in a bond fund charging 0.60percent. Heres the calculation:
Money-market fund: $10,000 x 0.004 = $40.
Stock fund: $30,000 x 0.0095 = $285.
Bond fund: $15,000 x 0.006 = $90.
In this example, total costs on your $55,000 portfolio would be $415 a year.
Other caveats: Certain 401(k) investments also carry other investor-borne costs, so you need to be alert. The big ones to beware are sales charges or loads on mutual funds, which might run 5.25percent or more of the money you invest. Annuity contracts, available in some 401(k) plans, often carry fees such as surrender/withdrawal charges, which can be substantial.
More on performance: Mutual-fund expenses are standardized, making for easy comparisons, but there are nuances. Fund trading costs ? incurred when a portfolio manager buys and sells stocks or bonds ? dont show up as annual operating costs. These can be minimal or large, depending on how active the portfolio manager is. Trading costs eat into your results.
But total-return or performance numbers by mutual funds report already have all costs subtracted out, including those for trading. So, you dont have to adjust total-return or performance numbers; theyre net of expenses.?Russ Wiles
Want to know whats in your 401(k) plan?
If you need help deciphering your workplace retirement program and the fees involved, wed like to hear from you. The Arizona Republic wants to build a database of 401(k) plans being offered by employers in Arizona, with the purpose of making it easier for workers to determine if they are paying reasonable fees. The goal is to show costs and investments for plans offered by local employers, allowing for real-life comparisons.
To help us with this project and learn more about your own 401(k) plan, please send us information about the lineup of investments within your plan, as well as costs specified in the new disclosure forms. We wont run your personal investment information, and you can cross that out.
Were interested in the fee summary and investment performance sections of 401(k) statements, which list costs and other information for all investments offered. As readers send in details about their program, well start to build a database that we will publish periodically, and from that youll have a better idea of how your program compares, though we generally wont provide personal feedback.
Employers were required to provide fee information to workers by Aug. 30, said Joseph Doku of Plan Sponsor Services, a Phoenix company that helps employers manage their 401(k) plans. Employees have a right to request this and other important plan information, he said.
The first quarterly statement showing fees and expenses deducted for each participant must be provided no later than Nov. 14, Doku said.
You can fax copies of your 401(k) report ? with your personal information removed ? to the Business section of The Arizona Republic at 602-444-7363. You also can send it via e-mail to russ.wiles@arizonarepublic.com or mail to The Arizona Republic, c/o Russ Wiles, 200 E. Van Buren St., Phoenix, AZ 85004.
Source: http://www.bitegrandrapids.com/?p=878
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