Is Your 401(k) Working For You?
March 2010
For most workers, their employer’s retirement plan is a key determinant of their lifestyle in retirement. When the plan incurs excessive internal expenses or the investment selection is mediocre, the nest egg suffers greatly. Over a working lifetime, the loss can be significant.
Your 401(k) or other retirement plan is the best way to accumulate funds for your retirement years. But if the investment selections available in your plan are not performing, your savings are not growing at the rate they should. If the plan is paying more in expenses than required to provide the level of services needed to run the plan, then a portion of your return is literally being stolen from you.
Investment return and plan expenses are the most important variables in determining the growth of your retirement funds and, consequently, whether you can retire with the lifestyle you desire. On the positive side, both the participant investment options and the expenses paid to run the plan are controllable by the plan trustees.
Fiduciary Responsibility of Plan Trustees
The trustees of the plan are usually the President/CEO of the company along with the CFO and others appointed to this duty. The trustees have the fiduciary responsibility to ensure that the plan works in the best interest of the participants. Since the trustees are participants in the plan as well, it is also in their best interest to maximize the potential benefits of the plan.
One fiduciary obligation of the plan trustees is to provide a diversified group of investment options that realize acceptable performance. The trustees are required to review the investment selections on a regular basis to be sure the standard continues to be met.
Trustees are also responsible to ensure that the plan expenses are reasonable. Fees must be paid for the services of the plan provider, administrator, and advisor. Unfortunately, the fees paid to run your retirement plan are not easily recognized. Unless the trustees ask the right questions, it is difficult to determine the total expenses that are paid by the retirement plan. However, as part of their fiduciary obligation, the trustees must review and question the expenses periodically and determine whether reductions in costs are possible while maintaining the necessary services for the participants.
Impact of 1%
If your plan is paying too much in fees and/or the investment options are underperforming, you, as a participant, are losing in the long run. A one percent reduction in the annual growth of your 401(k) account can make a huge difference in your retirement nest egg.
For illustrative purposes, let’s assume that a worker participates in the company 401(k) plan for 40 years, from age 25 to 65. Let’s further assume that the worker contributes today’s maximum of $16,500 until age 50, and then another $5,500 per year as the catch-up to age 65. For this example, we will not include a company match or an increase in the maximum contribution amount. If this portfolio earned 5% each year, the ending value would be approximately $2,230,000. If the 401(k) would have earned 1% more, the value would have been $2,860,000. This is a $630,000 difference! If you averaged a 7% growth, but should have had 8%, the difference is over $1,000,000.
As you would expect, if we add a company match to our example and increase the annual contribution amount by 2% each year, the difference that 1% makes is even greater.
Summary
It matters! The incremental reduction in participants’ returns due to underperforming investments and/or excessive plan expenses can result in having hundreds of thousands or even millions of dollars less when you retire. What to do:
· If you are a trustee of a plan, insist on transparency of all fees paid by the plan and work with a qualified advisor who can monitor investment returns and offer recommendations as necessary.
· If you are a participant, ask questions. Remember, you are the one who will do with less in retirement if your retirement plan is not growing at its full potential.
