What to do if you're in a lousy 401(k) plan
And by lousy, I mean high cost
Fees are one of the most important factors of successful retirement investing — they determine how much ends up in your pocket after mutual funds and 401(k) plan providers take their cut. But most people are oblivious. If they take note of costs at all, fees of one, two or even three percent may not sound all that high.
But things look different when you run the numbers over time as costs compound. And fees usually are much higher in plans sponsored by small businesses. Often, they don’t offer low-cost passive index fund choices, and expense ratios are high.
My latest “Retiring” column for The New York Times offers the example of a hypothetical young saver to illustrate the career-long effect of plans with a variety of fee levels. The results are staggering.
We considered a 28-year-old worker with a starting salary of $75,000 who saves diligently in her 401(k) account throughout her career. She contributes 6 percent of her salary annually and receives a 3 percent matching contribution from her employer. The scenario shows the effect of what she will have at three possible retirement ages. At 65, her portfolio is nearly 66 percent smaller in a high-cost plan compared with the lowest.
If you’re in a mediocre or bad 401(k) plan, what should you do?
If your employer’s plan offers an annual matching contribution, save enough to capture it — doing otherwise leaves money on the table. Also, pay careful attention to your investment choices, and look for the least expensive options — if possible, a low-cost index fund that tracks the entire stock market.
After you’ve captured the match, consider low-cost options outside your 401(k) for additional saving. Learn more in my latest “Retiring” column for The New York Times.
What I’m reading
The 401(k) industry owns Congress . . . Why older Americans are drinking so much . . . Golden Bachelor couple splits up three months after they married . . . IRS postpones inherited IRA withdrawal deadline . . . The psychologist who turned the investing world upside down . . . Your financial adviser doesn’t want you to know about these conflicts . . . Boomers bought up the big homes, and they’re not budging . . . Medicare Advantage insurers are under pressure . . . Senior housing rebounds as Boomers move in . . . More debate about “the number” on retirement savings . . . We’re old, retired and apparently invisible . . . Wall Street index funds bought shares in blacklisted Chinese companies . . . As Maine ages, immigrants fill the labor gap in what may be a prelude for the U.S.
Perhaps even more egregious are 403(b) plans. My wife worked for a school district and had a terrible plan - sales loads of 5%, fees exceeding 1%, 12b-1 fees, poor service and advice. Because I was in a much better 401(k) plan with some insight into how much better things could be, I began a push to change her plan. We were told and read from other financial planners, that it was impossible to change her 403(b) provider. But I also read from others online that it was possible, and so I persisted. I was eventually able to change her plan to one offered by one of the biggest custodians with much lower fees and NO sales charges. Please help spread the word that people in these plans are getting ripped off and they too should fight the administrators of the plans to make this change.