Understanding Your 401(k) Plan’s Costs

Much has been written lately about the importance of understanding how much you’re paying in fees in your 401(k).  Much of this recent interest is the result of a change in regulations that will be coming shortly.  Starting July 16, 2011, Department of Labor regulations will require that plan providers report the direct and indirect costs of the plan to the plan sponsor, generally the employer.  Additionally, on January 1, 2012, all fees, including administrative and investment fees, will have to be fully disclosed to the individual employees.

Why 401(k) Fees are Important

The level of fees can vary from one plan to another, depending on how the plan is structured.  A difference of even 1% per year, seemingly a nominal amount, can make a tremendous difference in how much an employee has available for retirement.

As an example, take an employee that has 35 years left until retirement with a current $25,000 401(k) balance.  If the employee earn 8% per year over the full 35 years, here’s the difference in account balance at retire using a .5% fee versus a 1.5% fee:

Original Amount            Ending Value @ .5%   Ending Value @ 1.5%

$25,000                                  $314,000                 $227,000

As you can see, an increase in costs of 1% per year will reduce the amount available in retirement by $87,000 or 28%.

Types of Fees in a 401(k)

  •  Plan Administration Fees:  these will include record keeping, accounting, legal and trustees.
  •  Investment Fees:  these fees will include the management fees for the mutual funds in the plan and 12b-1 fees, which are used to pay for advertising and broker commissions.  Often times your fund returns are stated NET of the fees charged so they may be hard to determine.
  • Insurance Charges:  if your plan has at its core an annuity, there will be an additional charge for the cost of the insurance guarantees.
  •  Target Date Funds:  these funds, while convenient, often are a single fund made of up several underlying funds.  The result is that the Target Date Fund may have investment fees in addition to the investment fees attached to the underlying funds.

When you originally signed up for your 401(k) you were handed a lot of paperwork, including paperwork that spells out your plan’s costs.  If you can’t find the paperwork, you can find more information in the following places:

  • Summary Plan Description:   this document was given to you when you originally enrolled in the plan and then every 5 years thereafter.  It  may tell you if administrative expenses are paid by the employer or employee and how they’re allocated among participants.  If you don’t have the original, just ask your plan administrator for a copy.
  • Your account statement:  it may show plan administrative expenses allocated to your account.
  • Form 5500:  Every 401(k) plan must file a Form 5500 with the government.  This document will show liabilities, expenses and income for the plan as a whole, but it won’t show what was deducted from your specific account.  This can be accessed at sites like http://www.freeerisa.com.

Five Questions to Ask Yourself Regarding Fees

  1. Do I have all the available documentation about the investment choices in my plan as well as all the fees charged to my plan?
  2. Do I use most or all of the optional services offered by my plan such as loans, insurance, etc.?
  3. If administrative services are paid separately from investment management fees, are they paid for by my plan (me), the employer or both?
  4. Do any of the investment options include sales charges, loads or commissions?
  5. Do any of the investment options include any fees related to specific investments such as 12-b1 fees, insurance charges or surrender charges, and what do they cover?

At the end of the day, your employer is providing you a tremendous benefit by offering a 401(k) plan for its employees, but it is YOUR responsibility to fully understand your plan so that you can make the best decision for your individual circumstances.


Is Now The Time to Convert Your Traditional IRA to a Roth IRA?


With great adversity comes great opportunity. While nobody likes to see the account balances in their IRA drop 40% or more, the reduced value in your IRA may make it an opportune time to convert your Traditional IRA to a Roth IRA since it will cost you much less in taxes than it would have in any of the past 4 years.

Traditional IRA vs. Roth IRA Basics

A Traditional IRA allows you, with some limitations, to deduct your IRA contribution when you make it. Over time, your account grows tax-free until you start taking distributions. Once you begin to take distributions, the amount you take each year after age 59 ½ is taxed at your rate at your current income tax rate.

A Roth IRA on the other hand, does not provide you with an up-front tax deduction. Like the Traditional IRA, your account grows tax-free but, unlike a Traditional IRA, when you take distributions there is NO tax liability.

Why Convert?

Roth IRA’s have four big advantages:

1. Tax-free growth. Like a Traditional IRA, the growth in your account is not taxes.
2. Tax-free withdrawals. As long as you’ve owned your Roth IRA for five years or have reached age 59 ½, the amount you take out of the account is not taxed.
3. Contributions can be made after age 70 ½. While you can longer make contributions after age 70 ½ in your Traditional IRA, there is no such restriction for the Roth IRA.
4. No mandatory distributions. In a Traditional IRA, one you reach age 70 ½, you must start taking Required Minimum Distributions (RMD’s) each year from the account. Because you didn’t get an up-front tax deduction for your Roth IRA, you’re not required to take RMD’s.

Reasons Not To Convert

1. Taxes. When you convert from a Traditional to a Roth IRA, you’ll need cash to pay taxes on the earnings and pre-tax contributions you made. Warning: you can’t use your IRA to pay the taxes since the amount you use for taxes would be considered an early withdrawal, subject to income tax and a penalty.
2. You anticipate being in a lower tax bracket in the future. If you’re currently in the 35% tax bracket and you think you’ll be in the 25% bracket in retirement, you’ll be paying taxes at your higher current rate.

Who Is Eligible to Convert?

In 2009, in order to be eligible to convert your IRA, you must have an Adjusted Gross Income (AGI) of less than $100,000. In 2010, there will be no income limitation on a Roth conversion.


If the market continues to tank through 2010, the government has provided you with the ability to take a mulligan. Otherwise known as a ‘re-characterization’, this give you until October 15, 2010 to reverse your decision to do the conversion in 2009 and re-do it on the new lower amount in your IRA.

Consult a Professional

The tax code is a fluid, complex animal. Before undertaking this type of conversion, be sure to consult your CPA or tax professional to ensure that you do everything right to avoid an unnecessary complications.

What’s a Terrified Investor Supposed To Do?

The Dow Industrial Average is down more than 35% so far this year, with an almost 679 point drop today alone.  There’s not doubt about it, but this market is in the midst of a full-blown panic.

Stocks are down, bonds are down or barely hanging on, oil and gold are down, real estate is down.  So given all the doom and gloom, what’s a shell shocked investor supposed to do?  Here are few tips to help you ride out the current market.

  • Don’t panic. Now is not the time to sell all your stocks.  If you were going to do that, the time was 12 to 18 months ago.  By selling now, you’ll simply lock in what is still a paper loss.
  • Remember your time horizon. If you’re young, this market will provide a great buying opportunity.  If you’re nearing retirement, you may want to follow the next piece of advice.
  • Scale back your equity exposure. Don’t sell everything, but it would be wise to have a little more cash than usual.  We currently have our clients with a lot more cash than usual so we can start buying again when the panic subsides.
  • Review your asset allocation. Some asset classes have gotten hit harder than others.  Now is a great opportunity to reallocate your portfolio without the tax bite you might get under more normal circumstances.
  • Talk to your advisor. If you haven’t spoken to, or heard from, your advisor, now is the time to be proactive and schedule an appointment to review the above items.  You’ll most likely leave that meeting knowing you’re doing everything in your power to minimize the damage of our current situation.

This has undoubtedly been a brutal market that has tested the stomachs of even the most seasoned professionals.  While you may have to make small adjustments to your current portfolio to reflect current circumstances, remember that your investment portfolio is built for the LONG TERM and that, over time, your patience and fortitude will be rewarded.

Supreme Court Allows Individuals to Sue Their 401(k) Plan

Yesterday, the Supreme Court unanimously voted to allow individuals to sue their 401(k) plan administrators for mistakes made in administering their plan. Until this ruling, individuals were only allowed to sue their 401(k) plan administrator on behalf of all plan participants, essentially in cases where the administrator absconded with plan funds.

So what does this really mean for your 401(k) plan? The general outcome is unknown, but what is certain is that it will lead to more litigation aimed at 401(k)’s. In essence this ruling allows people to sue if their plan administrator breaches their fiduciary responsibility. The question really is, what falls under that responsibility? Is it merely, as in this particular case, moving the funds around as requested by the participant, or will it encompass other things like the number of fund choices available, the overall costs of the plan, the default investment choices and any one of the myriad options a plan provider must consider? Only a string of litigated cases will start to define the scope of this ruling.

The fear is that small employers, already struggling to pay for plans, will simply decide that the potential cost of defending cases will simply cause them to eliminate the plans altogether. Others think that the costs of the plans will increase to cover the cost of potential future litigation.

We’ll keep you posted as this thing plays itself out.