That’s real money. So the message is: start paying attention. Monitor your returns, watch the bottom line, choose your investments carefully and, if necessary, throw your weight around to get a plan that suits a semi-wealthy player like yourself. Agitation works. Most employers, doubly motivated by a desire to woo workers and avoid lawsuits, will spiff up their plans if pressed, says Katherine McBreen of The Spectrum Group, a San Francisco research firm. She credits most new plan improvements to “the vocal minority” of pension-savvy participants who are demanding better options. Here’s where to focus now:
Performance Anxiety The first place to look is performance. The 401(k) powerhouse funds–Fidelity’s Magellan and Contra, Vanguard 500 Index and American Century Ultra–are topping 23 percent a year for three years running, according to Morningstar. So who can complain? You’d be surprised. The Standard & Poor’s 500 Index has gone up close to 28 percent a year over that time, and Steven Zients, at provider T. Rowe Price, says he spends his days explaining to participants and employers that the stocks powering the S&P 500 are just a small segment of the market that won’t outperform forever.
So if you haven’t been beating those returns because you carefully allocated your 401(k) assets among large and small stocks, bonds and international stocks, just sit tight, wait for your sectors to shine and repeat this mantra: “The purpose of asset allocation is to reduce risk.” Avoid the loser’s game of chasing returns, and don’t bet your whole retirement on the S&P 500 tomorrow, or pull it all out the day after the index falls 30 percent, as three out of four 401(k) investors say they will, according to John Hancock.
Instead, learn to benchmark. That means finding out how your plan’s funds compare with their competitors and their investment universe. Compare your large-cap fund with the S&P 500 and other large-cap funds; your small-cap fund with the Russell 2000 index and other small-cap funds, and so on. If your funds don’t hold their own, join that vocal minority. With most 401(k) providers now offering funds from more than one family, there isn’t much excuse for an employer who sticks with lousy offerings. “If you aren’t within the top 25 percent of performing funds within your asset class, I’d go in to my employer and say, ‘What’s going on?’ " says Rebecca Morrow, editor of Managing 401(k) Plans, a trade publication. “It’s a red flag.”
Point Shaving There’s a lot of money being made on your 401(k) account, and you’re paying more of it than you used to. Think of it this way: A typical 500-employee plan costs about 1.2 percent a year for investment management and plan administration, says David Huntley of HR Investment Consultants in Baltimore, who reports that fees at some companies are as high as 2.5 percent. While those percentages may not seem high, they aren’t dropping as the accounts grow. “And let’s face it,” says Huntley. “The next billion costs no more to run than the first billion.” In dollars, that means that if you’ve got $80,000, it’s costing at least $1,000 this year.
And you’re paying more of that than your boss is, for two reasons. Most plan providers lowball the administrative fees they charge employers, asking $25 a head, far less for record-keeping that the industry concedes probably costs at least $80. Providers make that up and more in the investment expenses employees typically pay for themselves. And a growing number of employers are requiring employees to pay those administrative fees, too, reports Morrow.
You may find it hard to discover what you are paying, though. The Labor Department has been toying with the idea of requiring specific disclosures for more than a year but has gotten overwhelmed by the complexities. Not all plans are priced the same way, but they can include as many as 39 line items, ranging from trustee fees to balance inquiry charges, according to the Profit Sharing 401(k) Council of America, an employers’ group.
Ask your employer for the bottom line: what’s the total you are paying to be in this 401(k) plan? Expect your expenses to be higher if your company is small or your plan is new, or if you have lots of bells and whistles in your program. Find out whether your plan offers lower-cost funds. And start thinking now about a 401(k) future that is based on flat fees instead of percentile charges, unless you want to be spending $12,000 or more a year once you get that cool million.
More Choices, Smart Choices Most companies have moved far beyond the old “do you want company stock or company stock?” 401(k) plans, but it’s possible some have gone too far in the other direction, piling on more choices than most employees can comprehend or care about. Larger plans now offer dozens of funds, and the newest addition to most is a brokerage window through which 401(k) participants can trade themselves into oblivion with more than 1,000 mutual funds and the entire universe of individual stocks.
Companies like Eastman Kodak have started offering their employees tiered plans that allow them to choose their own level of interest. At the lowest level is the one-decision plan: Workers decide how many years they are away from retirement, and the company does the rest. The middle tier allows workers to choose among six different mainstream funds. At the top, says the firm’s compensation director, Rita Metras, employees get a program called “lots of choice.” It currently includes close to 30 funds, including arcane choices like Latin America and Far East Equity funds.
If you are facing fund overload, narrow it down by looking at the bargain-priced institutional funds that many larger plans are starting to add. You won’t find these offerings in the newspaper; they’re like buying wholesale instead of retail. But with costs in the 0.1 to 0.3 percent range instead of the 1 percent you find with popular funds, you can learn to live without the newspaper listings and look them up online. You’ll get competitive returns and save money on management and trading, says US West’s 401(k) manager Don Butt, who keeps 95 percent of his own money in this low-cost core.
And ask for advice. While most companies steer clear of providing specific investment advice to their employees, more enlightened employers are providing one-on-one financial-planning sessions or signing up for Internet services like the 401(k) Forum, a site run by a San Francisco advisory firm that caters to the pension crowd. If your boss won’t do it, get expert help for yourself.
After all, if you’re going to be a millionaire, shouldn’t you have your own financial adviser?
