Lawsuits are piling up on the desks of HR directors around the country, all with a common theme: The employee retirement plan was too costly and the company should have known better.
Retirement investing is not an expensive process. There are only a few variables and the marketplace is fairly transparent. Unless, of course, you are in a small 401(k) plan.
That’s where a horde of plan providers have taken advantage, driving up costs to their own benefit, the suits allege. Employers are stuck in the middle, on the hook for the outcomes but not well enough informed to do better by their own workers.
How would you know if your 401(k) plan or personal IRA is too expensive for your own good? Normally, you wouldn’t, but it’s vital to get educated. Every added cost literally subtracts from your overall return, hobbling your chances of retiring when you expect.
Here are three signs that your 401(k) or IRA costs too much:
It’s hard to find out fees
You would think “what am I paying?” would be a simple question with a simple answer. And the answer is simple. If you have an advisor, he or she charges a percentage of your assets as an annualized fee, probably 1%. The investments you own, usually actively managed mutual funds, charge an additional combined 1% fee.
In 401(k) plans there are management overhead charges, too. Your HR director should be able to tell you what all of these numbers add up to as an annualized percentage of your assets and as a dollar cost to you personally. If you ask these questions and get nowhere, it’s because the answer is embarrassing or your employer has no idea.
Likewise, if you have an IRA with a personal financial advisor and get vague or hard-to-understand “laundry list” answers, time to act. You almost certainly are overpaying.
Poorly explained charges
Mutual funds in particular are crammed with mystery charges that make buying a car look like a walk in the park. An oldie-but-goodie is the “12b-1 fee,” a fee that, believe it or not, is you paying to advertise the mutual fund to new investors. Why do you pay for this? Shouldn’t performance alone be their calling card?
Not really. Mutual funds don’t like to admit it, but they play a constant game of catch-up against the market indexes. Subtract their fees and they look awful in comparison to the stock market itself. The only way to keep many funds going, frankly, is advertising.
Investment options are limited
This is typical of 401(k) plans. In a bid to keep things “simple” for the overwhelmed investor, 401(k)s reduced their offerings to 10 or 12 mutual funds. Problem is, the funds often are all overpriced. Fund expenses have been falling over time, but nowhere near the decline in real investment cost.
What’s the answer? If you are a small company employee and have a 401(k), first check to see if your plan has an index fund option. Those will be the cheapest funds in which to invest by far. There might also be a target-date fund option that combines index funds and provides basic portfolio oversight at a low cost.
If you are using an IRA, first decide if having an advisor will help keep you on track with your goals. If the answer is no, then buy a target-date fund from Vanguard and you’ll be in better shape without much effort at all.
If hiring an advisor is your goal, make sure the fees you are charged are commensurate with the service received. Many investors pay 1% or more for a financial advisor and never speak to them at all!
You should be getting regular communications, personal contact and a clear vision of how your retirement investments will perform, year in an year out, not a dry quarterly communique and a call center number. Get what you pay for, both from an advisor and from the investment funds you own.