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Last night, Frontline aired a documentary on retirement and 401k plans. The biggest revelation to me was how much money Americans lose to plan fees each year. My own 401k has extremely low fees and I attribute that to working for a very large company that was able to use its size to negotiate the reasonable fee. I never thought to look at my husband's statements to see what his fees are and when I did, I realized that he is paying a significant amount in fees per year. Given that we are aggressively saving for retirement by contributing the max dollar amount allowed by the feds each year, it is disappointing and frustrating to lose almost 10% of his contributions to fees.
Can anything be done short of his company renegotiating with the plan administrator or switching to another company? Are fees solely dictated by the administrator or by the type of plan he is invested in? Should we just take the money out and put it in his traditional IRA (we don't qualify for Roth IRAs) which is through Vanguard and therefore carries lower rates? Although, as I write this I wonder if he can even do that if he has a qualified plan he can contribute to. I know this requires more research on my part but I thought I would tap into the collective knowledge of CD. Thanks in advance for any responses.
10% is a LOT, way more than average. His company should be doing their due diligence and should be shopping their 401k plan at least every 2 years. If they have not done that, your husband should address this with HR. If he works for a small company, often the HR people are not aware of this...It's worth bringing up.
10% is a ridiculous amount. Can you provide more specific examples of what those fees are? I know some plans (not a lot) charge fees outside of the mutual fund expense ratios and they can range from a per capita (same fee for everyone) or pro-rata (your fee is based on how much you have in your 401k - people with less pay less, people with more pay more).
As for trying to fight this, you pretty much have it right that your husband's benefits director/HR Admin/CFO will need to renegotiate or go out to bid for a new provider. Plan fees are also contingent on the type of funds that are available in the plan lineup. If his company has "really good" funds (Vanguard/T.Rowe Price for example) that pay next to nothing to the provider then the plan in turn will be assessed a higher fee to recoup for that loss of revenue to the provider. Your husband's company then passes those costs down to the participants or absorb it themselves if they're generous.
Some funds pay more to the 401k provider and unfortunately in most cases, those types of funds are pretty crappy... It's a vicious cycle. 401k provider will push to add crappy funds that pay more to them which in turn will lower the fees for plan participants/company but you potentially sacrifice performance. It ultimately comes down to how much your husband's company has in the 401k to see if they can leverage off of their size. Small plans (less than $10m in total assets) don't have a fighting chance in most cases.
As for taking money out while still employed, here are some conditions:
a) need to be over 59.5 years old
b) the plan will need to allow for an in-service withdrawal - this is a plan/company specific provision and should be outlined in the SPD (summary plan description) and certainly in the plan document/adoption agreement.
c) If in-serivce is allowed, they will more than likely restrict you from taking any employer based funds (match, profit sharing etc.) and only allow access to your pre-tax contributions and/or Roth 401k contributions. Some plan allows all sources to be tapped (outside of safe-harbor source) so check with your admin if in-service is allowed.
Last edited by Ivan Putski; 06-19-2013 at 11:10 AM..
it is disappointing and frustrating to lose almost 10% of his contributions to fees.
Numbers in that range are typically expressions of the compound effect of fees. So fees in the 2% range, compounded over thirty or forty years, yields returns that are 10% less than without the fees. That is precisely what was pointed out during that Frontline documentary... not that people are reguarly getting hit with 10% fees on contributions.
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Originally Posted by grandcentraluk
Can anything be done short of his company renegotiating with the plan administrator or switching to another company? Are fees solely dictated by the administrator or by the type of plan he is invested in?
My understanding is that the employer has a lot of power in this situation, if they're willing to make up the difference by paying the custodian more. However, most companies (including my own) hide behind what they claim are limited choices offered by the custodians. They generally won't admit that they could switch to another custodian and get a better deal for their employees, because that better deal will either incur too much cost for the company up-front or ongoing, or perhaps even because doing so will result in less of a kickback from the custodian to the company for hosting their 401k there.
Depending on the custodian, there are different arrays of choices available for clients with aggregate assets under investment (i.e., the total value of all of the employee's accounts for a company) below $500k, between $500k and $1M, between $1M and $2M, etc. (The thresholds may vary from custodian to custodian.) Each time a client goes from one basket into another, new (perhaps less costly) choices become available, choices that I assume aren't available at the lower thresholds because the custodians make less money somehow putting you in those funds than in the more expensive funds that are available at the lower thresholds.
Quote:
Originally Posted by grandcentraluk
Should we just take the money out and put it in his traditional IRA (we don't qualify for Roth IRAs) which is through Vanguard and therefore carries lower rates?
First, I think you need to differentiate between "take the money out" and what you're going to do about ongoing contributions. Someone else already addressed the former, so I'll address the latter: Remarkably small levels of company match justify participating in the company 401k. Furthermore, if you don't qualify for Roth IRAs then you probably cannot contribute tax deferred to a traditional IRA. (We are in that situation, ourselves.) So you're making a good amount of money (like we are) and you would be giving up the best way of sheltering up to $23k (with catch-up) from tax you have available to you at this point. While there are some people who swear right and left that it is better to do without tax deferred retirement savings than to participate in a crappy 401k, I've never found a single analysis that proves that we'd be better off that way.
[10% is a ridiculous amount. Can you provide more specific examples of what those fees are? I know some plans (not a lot) charge fees outside of the mutual fund expense ratios and they can range from a per capita (same fee for everyone) or pro-rata (your fee is based on how much you have in your 401k - people with less pay less, people with more pay more)
There are fees associated with each fund and while individually they are not a lot, they add up. I don't know what the fees are for other than that they are the fees associated with each fund and there are a lot of funds. So $18 here, $15 there, it is adding up.
Quote:
Numbers in that range are typically expressions of the compound effect of fees. So fees in the 2% range, compounded over thirty or forty years, yields returns that are 10% less than without the fees. That is precisely what was pointed out during that Frontline documentary... not that people are reguarly getting hit with 10% fees on contributions.
When I said 10%, I meant that he contributes the max allowed by the government ($17,500) and pays nearly $400 in fees per quarter which will come to close to 10% of his contributions. Is that not accurate?
[quote]First, I think you need to differentiate between "take the money out" and what you're going to do about ongoing contributions. Someone else already addressed the former, so I'll address the latter: Remarkably small levels of company match justify participating in the company 401k. Furthermore, if you don't qualify for Roth IRAs then you probably cannot contribute tax deferred to a traditional IRA. (We are in that situation, ourselves.) So you're making a good amount of money (like we are) and you would be giving up the best way of sheltering up to $23k (with catch-up) from tax you have available to you at this point. While there are some people who swear right and left that it is better to do without tax deferred retirement savings than to participate in a crappy 401k, I've never found a single analysis that proves that we'd be better off that way.
Yes, I wasn't really thinking when I said that. We definitely need the tax advantages from the pre-tax contribution as we are in a higher tax bracket. There is no employer matching with my husband's 401k. The reason we contribute is (1) to save for retirement and (2) obtain the tax benefit. So the money stays - thanks for making me realize that!
Quote:
As for trying to fight this, you pretty much have it right that your husband's benefits director/HR Admin/CFO will need to renegotiate or go out to bid for a new provider. Plan fees are also contingent on the type of funds that are available in the plan lineup. If his company has "really good" funds (Vanguard/T.Rowe Price for example) that pay next to nothing to the provider then the plan in turn will be assessed a higher fee to recoup for that loss of revenue to the provider. Your husband's company then passes those costs down to the participants or absorb it themselves if they're generous.
The Frontline documentary talked about the low costs associated with funds from Vanguard and it never occurred to me that this would work against us if my husband was invested in their funds through his 401k but that is exactly what is happening. The Vanguard funds have the highest fees. Thank you for pointing this out.
His company is wonderful but they are not very sharp when it comes to benefits. It isn't a large company, and the majority of employees are high income earners who likely don't think about these things. Quite frankly, I hadn't either until that documentary aired last night. I don't know if they will do anything about this though he will ask. In the meantime, I'm thinking it might make sense to move some money around to funds with lower fees, though if there is a fee to conduct the transaction, that will just mean throwing more money at the PA.
if the fees are too much, you may want to just contribute enough to get the employer match and save his retirement money in a brokerage account or regular IRA. just because money isnt in a "retirement account" doesnt mean you cant use it for retirement savings. the vast majority of my retirment money is in standard brokerage accounts.
Last night, Frontline aired a documentary on retirement and 401k plans. The biggest revelation to me was how much money Americans lose to plan fees each year. My own 401k has extremely low fees and I attribute that to working for a very large company that was able to use its size to negotiate the reasonable fee. I never thought to look at my husband's statements to see what his fees are and when I did, I realized that he is paying a significant amount in fees per year. Given that we are aggressively saving for retirement by contributing the max dollar amount allowed by the feds each year, it is disappointing and frustrating to lose almost 10% of his contributions to fees.
Can anything be done short of his company renegotiating with the plan administrator or switching to another company? Are fees solely dictated by the administrator or by the type of plan he is invested in? Should we just take the money out and put it in his traditional IRA (we don't qualify for Roth IRAs) which is through Vanguard and therefore carries lower rates? Although, as I write this I wonder if he can even do that if he has a qualified plan he can contribute to. I know this requires more research on my part but I thought I would tap into the collective knowledge of CD. Thanks in advance for any responses.
10% sounds very extreme. I'd really like to see the breakdown of that. I've seen some rip off 401k plans before, but nothing like that.
By the way, the Frontline show exaggerated the severity of this problem. Yes, high fee 401ks are a problem, but they made is sound like all or most people are in this situation. Nothing could be further from the truth. I have a great plan with low cost index funds as well as reasonable cost actively managed funds.
10% sounds very extreme. I'd really like to see the breakdown of that. I've seen some rip off 401k plans before, but nothing like that.
By the way, the Frontline show exaggerated the severity of this problem. Yes, high fee 401ks are a problem, but they made is sound like all or most people are in this situation. Nothing could be further from the truth. I have a great plan with low cost index funds as well as reasonable cost actively managed funds.
i didnt see this program, but i saw one that seems similar in the past. they were just using the expense ratio for the funds in the plan and they were above average but nothing crazy. then you figure out the future value of those fees after 30-40 years and they look like tons of money. but in reality, they may have been .25-.5% higher than an average fee for an actively managed mutual fund.
First, I think you need to differentiate between "take the money out" and what you're going to do about ongoing contributions. Someone else already addressed the former, so I'll address the latter: Remarkably small levels of company match justify participating in the company 401k. Furthermore, if you don't qualify for Roth IRAs then you probably cannot contribute tax deferred to a traditional IRA. (We are in that situation, ourselves.) So you're making a good amount of money (like we are) and you would be giving up the best way of sheltering up to $23k (with catch-up) from tax you have available to you at this point. While there are some people who swear right and left that it is better to do without tax deferred retirement savings than to participate in a crappy 401k, I've never found a single analysis that proves that we'd be better off that way.
I just wanted to add that you CAN contribute to a Traditional IRA even if your employer offers a 401K. I think the income limit is 95K for married couples and it phases out between 95K and 115K.
When I said 10%, I meant that he contributes the max allowed by the government ($17,500) and pays nearly $400 in fees per quarter which will come to close to 10% of his contributions. Is that not accurate?
It would be remarkable if the fees were that high. That would almost surely be an ERISA violation, two times over.
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